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

Company

Recent Yield

5-Year Avg. Annual Div. Growth Rate

Payout Ratio

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Garmin (Nasdaq: GRMN)

5.7%*

Irregular

46%

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MTS Systems (Nasdaq: MTSC)

1.9%

10.1%

33%

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Badger Meter (NYSE: BMI)

1.5%

12.6%

31%

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Cognex (Nasdaq: CGNX)

1%

(0.8%)

17%

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Beckman Coulter (NYSE: BEC)

0.9%

4.8%

26%

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ESCO Technologies (NYSE: ESE)

0.9%

New dividend

10%

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Analogic

0.7%

1.8%

26%

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Cubic

0.3%

9.3%

9%

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Source: Motley Fool CAPS. *Based on company announcement of expected 2011 payouts.

Common mistakes to make here are to focus on just the highest yields or the fastest-growing dividends. That can be problematic if a high yield isn't growing quickly (or is falling!), or if a growth rate is so high that it's unsustainable for long -- particularly when the payout ratio is steep, leaving little room for growth. The companies above don't present those dangers, though.

You may notice that some major players in the industry aren't on the list. That's because some companies, particularly small and rapidly growing ones, prefer to plow excess cash into growth rather than paying it out to shareholders. That's sometimes true of larger companies, too, such as Agilent Technologies (NYSE: A), with its market cap topping $18 billion. Agilent paid a large special dividend in 2006, but is dividend-free at the moment.

Just right
As I see it, Garmin, MTS Systems, and Badger Meter are the most appealing right now. It's hard to estimate how quickly Garmin's dividend will grow, especially since it hasn't been growing revenue much in recent years, but for now it's making sizable payouts. The other two offer smaller but possibly faster-growing dividends. All offer some income now and a reasonable chance of
strong dividend growth in the future.

Remember that you can find great dividends elsewhere, too, such as in packaged consumer goods or oil refining.

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."

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article, but she loves her Garmin GPS device. Motley Fool newsletter services have recommended Cubic and Cognex. Try any of our Foolish 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 has a disclosure policy.