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 gaming 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 gaming
Below, I've compiled some of the major dividend-paying players in the gaming 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

Dover Downs Gaming & Entertainment (NYSE: DDE) 3.4% (2.5%) 57% Add
Ameristar Casinos (Nasdaq: ASCA) 2.3% 4.5% 280% Add
International Game Technology (NYSE: IGT) 1.5% (13.6%) 38% Add
Churchill Downs 1.2% 0% 48% Add
Wynn Resorts (Nasdaq: WYNN) 0.8%* irregular 659% Add

Data: Motley Fool CAPS.
*Not including special dividend.

If you focus on dividend yield alone, you might end up with Dover Downs and Ameristar Casinos, but a closer look reveals some issues with each of them. Dover Downs has a negative dividend growth rate, and Ameristar Casinos has a very high payout ratio.

In fact, each of the companies above has one or more troubling issues, ranging from slow or negative growth to steep payout ratios to puny yields.

You may also notice that some major players in the industry aren't on the list. Las Vegas Sands (NYSE: LVS) is pouring money into growth as it builds new properties, and MGM Resorts (NYSE: MGM) has been struggling and losing money, especially in Las Vegas. Meanwhile, some think that Melco Crown (Nasdaq: MPEL) is the hottest stock in gambling, with improving margins and lots of global opportunity -- but it just doesn't pay a dividend at the moment.

Just right
As I see it, there's no obvious winner, dividend-wise, among the companies above. Dover Downs seems the most promising, as it already offers a healthy yield, but that hasn't grown in a long time. International Game Technology has many bulls, but its current yield is on the low side. You may want to look into greener pastures, such as in foreign wireless companies, waste management, or beverages.

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, stocks with compelling dividends are great places to start your search, particularly if you're excited by the prospects for an industry.

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

To get more ideas for 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. Melco Crown Entertainment is a Motley Fool Global Gains selection. The Fool owns shares of 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.