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 insurance broker 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:
- The current yield
- The dividend growth
- 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 insurance brokers
Below, I've compiled some of the major dividend-paying players in the insurance broker industry (and a few smaller outfits), ranked according to their dividend yields:
5-Year Avg. Annual Div. Growth Rate
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Arthur J. Gallagher
Marsh & McLennan
|Willis Group Holdings||2.5%||3.5%||63%||Add|
Brown & Brown
Data: Motley Fool CAPS.
If you focus on dividend yield alone, you might end up with Arthur J. Gallagher and Donegal Group, but they're not necessarily your best bets. Gallagher's dividend growth rate is rather low, and both companies have steepish payout ratios that are approaching the point at which future dividend growth will depend entirely on earnings.
Instead, let's concentrate on the dividend growth rate first, where Donegal Group leads the way. However, it may be difficult for Donegal to maintain that rapid pace for long.
You may also notice that some major industry players such as eHealth
I'm not entirely comfortable with any of these companies. To get the high yields that Gallagher and Donegal offer, you have to accept payout ratios with little margin for error. The others have more modest yields, although Brown & Brown is worth consideration. It's growing its currently modest dividend at a good clip with lots of room to grow in the future.
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. Remember, too, that you may find even more attractive dividends elsewhere, such as in packaged consumer goods or oil refining.
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 holds no position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of Aon. 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.
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