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

Company

Recent Yield

5-Year Avg. Annual Div. Growth Rate

Payout Ratio

My Watchlist

Ship Finance International (NYSE: SFL) 7.7% (10.1%) 64% Add
Teekay LNG Partners (NYSE: TGP) 6.9% 31% 154% Add
Teekay Offshore Partners 6.6% 75.6%* 145% Add
Paragon Shipping (NYSE: PRGN) 6.4% (41.9%)* 45% Add
Euroseas (Nasdaq: ESEA) 5.6% (19.7%) NM Add
Golar LNG 5.4% Irregular 482% Add
Nordic American Tanker Shipping (NYSE: NAT) 4% (9.9%) NM Add
Teekay Corp. 3.6% 14.6% NM Add
Seaspan 3.2% (21.7%) NM Add
Alexander & Baldwin 3% 18.8% 57% Add
Tidewater 1.7% 13.3% 34% Add
Frontline (NYSE: FRO) 1.6% (34.5%) 97% Add
General Maritime (NYSE: GMR) 1.5% (24.2%) NM Add

Data: Motley Fool CAPS. NM = not meaningful due to negative earnings.
* 4-year growth rate.

If you focus on dividend yield alone, you might end up with Ship Finance International. But don't be too hasty -- Ship Finance sports a negative growth rate, and the other two have sky-high payout ratios.

Instead, let's focus on the dividend growth rate first, where Teekay Offshore Partners and Teekay LNG Partners lead the way. However, their growth rates are so steep that they'll be hard to maintain for long. Teekay Offshore's growth rate is also based on a particularly small initial dividend payment from several years ago. And the dizzying heights of both their payout ratios also send up a red flag.

Just right
The recession hit this industry hard, leading to fallen earnings, trimmed dividends, and rising payout ratios, all of which may reverse once a recovery is under way. Right now, Ship Finance International has a decent combination of attractive traits in a dividend stock. Its dividend yield is rich, and though its five-year dividend growth rate is negative, it raised its dividend three times in 2010, and has not been paying out more than it has been earning. It offers solid income now and a good chance of strong dividend growth in the future.

Others in the group, such as Paragon Shipping, Alexander & Baldwin, and Tidewater, are worth a closer look, as well. 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. Motley Fool Options has recommended writing a covered strangle position on Seaspan. The Fool owns shares of Seaspan and Tidewater. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.