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 varied manufacturing 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 varied manufacturing
Below, I've compiled some of the major dividend-paying players among miscellaneous manufacturers -- companies whose standard industrial classification codes fall outside better-defined categories -- ranked according to their dividend yields:

Company

Recent Yield

5-Year Avg. Annual Div. Growth Rate

Payout Ratio

My Watchlist

Hillenbrand (NYSE: HI) 3.5% New dividend 52% Add
Oil-Dri (NYSE: ODC) 3.1% 10.8% 48% Add
Brady 2% 7.5% 39% Add
International Game Technology (NYSE: IGT) 1.5% (13.6%) 38% Add
Daktronics (Nasdaq: DAKT) 0.9% 40.8% 67% Add
Blyth (NYSE: BTH) 0.6% (7.4%) 27% Add

Data: Motley Fool CAPS.

If you focus on dividend yield alone, you might end up with Hillenbrand and Oil-Dri, but you need to look beyond that metric. Hillenbrand, for instance, only started its dividend in 2008, so it's unclear how quickly it will grow.

Instead, let's focus on the dividend growth rate first, where Daktronics leads the way. Its growth rate is so steep, though, that it may be hard to maintain for long, and its yield is currently on the low side as well.

You may also notice that some companies are missing from the list. Like International Game Technology, WMS Industries (NYSE: WMS) makes gaming equipment, but it doesn't pay a dividend. A much smaller company that falls into this catch-all category is China Fire and Security Group (Nasdaq: CFSG), with a market cap below $200 million. Such companies often need to plow excess cash back into the company to fuel growth. They can reward shareholders with greater price appreciation, rather than dividends.

Just right
As I see it, Oil-Dri gives you the best of everything for a dividend stock, with a yield above 3%, a healthy dividend growth rate, and a reasonable payout ratio. You might also keep an eye on Daktronics and Hillenbrand to see how their dividends increase. If you're much more interested in current yield than growth, Hillenbrand might be of interest now.

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.

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Hillenbrand is a Motley Fool Income Investor choice. The Fool owns shares of Hillenbrand and International Game Technology. 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.