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


Recent Yield

5-Year Avg. Annual Div. Growth Rate

Payout Ratio

My Watchlist

Paychex (Nasdaq: PAYX) 3.9% 16.1% 88% Add
CDI (NYSE: CDI) 3.5% 4.3% NM Add
Barrett Business Services (Nasdaq: BBSI) 2.3% 6.5%* 46% Add
Robert Half International (NYSE: RHI) 1.8% 13.4% 118% Add
Manpower (NYSE: MAN) 1.2% 9.0% NM Add

Data: Motley Fool CAPS
NM = Not meaningful due to negative earnings
*Over past four years.

If you focus on dividend yield alone, you might end up with Paychex and CDI, but they're not necessarily your best bets. Paychex's payout ratio is a little steep, and CDI has reported net losses in the past two years.

If you look at the dividend growth rate first, you end up with Paychex and Robert Half International. Their payout ratios don't leave room for much growth, though.

You may also notice that the list excludes several significant industry names, including 51job (Nasdaq: JOBS) and AMN Healthcare Services (NYSE: AHS). Many small and medium-sized companies such as these are busy growing rapidly, and they prefer to use any excess cash to fuel that growth. AMN focuses on nursing staffing, and it's expanding into physicians and home-care nurses, while 51job focuses on jobs in China.

Just right
As I see it, Paychex and Barrett Business Services give you the best dividend traits among the companies above. They sport yields between 2% and 4%, healthy dividend growth rates, and acceptable payout ratios. They each offer some solid income now and a good chance of dividend growth in the future. Once our economy picks up steam, these firms' fortunes should improve.

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 for great dividend-paying stocks, read about "13 High-Yielding Stocks to Buy Today."