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 plastic materials 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 plastic materials
Below, I've compiled some of the major dividend-paying players in plastic materials and synthetic resins (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

Schulman (Nasdaq: SHLM) 2.7% 4.1% 52% Add
Eastman Chemical (NYSE: EMN) 2% 0.2% 30% Add
Dow Chemical (NYSE: DOW) 1.7% (17.8%) 35% Add
Albemarle (NYSE: ALB) 1.2% 13.3% 16% Add
Sinopec Shanghai Petrochemical (NYSE: SHI) 0.8% * 11% Add

Data: Motley Fool CAPS.
*Sinopec has had widely varying dividend payments over the past five years.

If you focus on dividend yield alone, you'll end up with Schulman and Eastman, but take a look at those dividend growth rates, especially Eastman's. Those yields don't look like they'll be growing very briskly.

Instead, let's focus on the dividend growth rate first, where Albemarle leads the way. However, its yield is so low that it will take quite a while to grow to a more impressive level.

If you're familiar with the industry, you may also know that some major players in the industry aren't on the list. LyondellBasell Industries (NYSE: LYB), for example, has emerged from bankruptcy with a market cap greater than $20 billion. It has plenty of investors bullish about its valuation, but it doesn't pay a dividend at this point. Other well-regarded denizens of the industry are still plowing their excess cash into growth, including Landec (Nasdaq: LNDC) and its sub-$200 million market cap.

Just right
This isn't the most attractive bunch of companies from a dividend-seeking perspective. You may want to look into greener pastures, such as in foreign wireless companies, waste management, or beverages. Still, among the companies above, Schulman stands out, offering a sizable yield, a modest growth rate, and a not-too-high payout ratio. 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.

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.

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Try any of our investing newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool is Fools writing for Fools.