Dividend payers deserve a berth in any long-term stock portfolio. But seemingly attractive dividend yields are not always as fetching as they may appear. Let's see which companies in the furniture and fixtures industry offer the most promising dividends.

Yields and growth rates and payout ratios, oh my!
Before we get to those companies, though, you should understand just why you'd want to own dividend payers. These stocks can contribute a huge chunk of growth to your portfolio in good times, and bolster it during market downturns.

As my colleague Matt Koppenheffer has noted: "Between 2000 and 2009, the average dividend-adjusted return on stocks with market caps above $5 billion and a trailing yield of 2.5% or better was a whopping 114%. Compare that to a 19% drop for the S&P 500."

When hunting for promising dividend payers, unsophisticated investors will often just look for the highest yields they can find. While these stocks will indeed pay out the most, the yield figures apply only for the current year. Extremely steep dividend yields can be precarious, and even solid ones are vulnerable to dividend cuts.

When evaluating a company's attractiveness in terms of its dividend, it's important to examine at least three factors:

  1. The current yield
  2. The dividend growth
  3. The payout ratio

If a company has a middling dividend yield, but a history of increasing its payment substantially from year to year, it deserves extra consideration. A $3 dividend can become $7.80 in 10 years, if it grows at 10% annually. (It will top $20 after 20 years.) Thus, a 3% yield today may be more attractive than a 4% one, if the 3% company is rapidly increasing that dividend.

Next, consider the company's payout ratio, which reflects what percentage of income the company is spending on its dividend. In general, the lower the number, the better. A low payout ratio means there's plenty of room for generous dividend increases. It also means that much of the company's income remains in its hands, giving it a lot of flexibility. That money can fund the business's expansion, pay off debt, buy back shares, or even buy other companies. A steep payout ratio reflects little flexibility for the company, less room for dividend growth, and a stronger chance that if the company falls on hard times, it will have to reduce its dividend.

Peering into furniture and fixtures
Below, I've compiled some of the major dividend-paying players in the industry (and a few smaller outfits), ranked according to their dividend yields:

Company

Recent Yield

5-Year Avg. Annual Div. Growth Rate

Payout Ratio

Leggett & Platt (NYSE: LEG) 4.5% 13.2% 92%
Hooker Furniture (Nasdaq: HOFT) 3.1% 8.0% 67%
HNI (NYSE: HNI) 2.9% 6.7% 146%
Kimball International (Nasdaq: KBALB) 2.8% (21.1%) 91%
Flexsteel Industries (Nasdaq: FLXS) 2.0% (18.2%) 16%
Steelcase (NYSE: SCS) 1.6% (14.0%) NM
Knoll 1.2% (26.1%) 20%
Ethan Allen 0.9% (20.0%) NM
Herman Miller (Nasdaq: MLHR) 0.3% (20.4%) 15%

Data: Motley Fool CAPS. NM = not meaningful due to negative earnings.

Focusing on dividend yield alone isn't always the best move. Looking at dividend growth and payout ratios is also important.

But here, the top-yielding stocks also happen to have pretty favorable characteristics overall, though HNI's payout ratio is disturbingly high. If earnings don't catch up to its dividend payouts soon, the company's dividend growth could slow or stop entirely.

Just right
I find Hooker Furniture the most appealing of this bunch. It has the best combination of a yield greater than 3%, a solid dividend growth rate, and a reasonable payout ratio. For those seeking the most income now, Leggett's 4.5% yield is attractive, even if it doesn't have much more room to grow. Flexsteel Industries is also worth a closer look; it has a rock-bottom payout ratio and has begun increasing its payout sharply, with a recent 50% hike. Each of these three stocks offers some income now and at least some chance of dividend growth in the future.

Of course, as with all stocks, you'll want to look into more than just a company's dividend situation before making a purchase decision. Still, these stocks' compelling dividends make them great places to start your search, particularly if you're excited by the prospects for this industry.

Do your portfolio a favor. Don't ignore the growth you can gain from powerful dividend payers.

To get more ideas of great dividend-paying stocks, read about "13 High-Yielding Stocks to Buy Today."

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.