Dividend payers deserve a berth in any long-term stock portfolio. But seemingly attractive dividend yields aren't always as fetching as they may appear. Let's see which companies in the fertilizer 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. Although 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' 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 fertilizers
I've compiled some of the major dividend-paying players in the fertilizer industry (and a few smaller outfits), ranked according to their dividend yields:
5-Year Average Annual Dividend Growth Rate
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Sociedad Quimica y Minera
Data: Motley Fool CAPS.
*Past three years.
Obviously, Terra Nitrogen stands out for its healthy dividend. But you shouldn't let its hefty dividend growth rate fool you; with its dividend already near its earnings, Terra Nitrogen will be able to grow its payout only as fast as it can boost its net income.
Potash and CF Industries might draw your attention with huge dividend growth numbers. But their current yields are so low that they will take quite a while to grow significantly. Note that in this industry, some players have bumpy dividend histories, with growth occurring not on a straight line, but a jagged one.
You may notice, too, that some notable players in the industry, such as Yongye International
As I see it, none of these companies offers the perfect combination of dividend traits, sporting some solid income now and a good chance of strong dividend growth in the future. But Terra Nitrogen may serve you very well, offering a big current yield, while CF Industries and Sociedad Quimica y Minera are worth watching, as their dividends could reach attractive levels in short order.
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.
Looking for some All-Star dividend-paying stocks? Look no further.