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 reasonable ones are vulnerable to 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 gambling companies
Dividend investors typically focus first on yield. One of the highest dividend yields in gaming is that of Ameristar Casinos, at 2.8%. But it has only been growing at 3.1% annually over the past five years and has a heavy debt burden.
Instead, let's focus on the dividend growth rate. Las Vegas Sands (NYSE:LVS) recently yielded 2.2% and is generally well-regarded, but its dividend is new, so there's no track record of growth to assess. The company is expanding in locations such as Macau and Spain, but Spain is facing major financial troubles, and Macau's growth has slowed. A recovery in Las Vegas itself bodes well, though. Competitor Wynn Resorts (NASDAQ:WYNN), yielding 1.7%, is also appealing, but though its dividend doubled between 2010 and 2011, it's still down from where it was a few years ago. Still, it's moving in the right direction now. Analysts recently upgraded both stocks, expecting a pickup in business in Macau.
International Game Technology (NYSE:IGT) is also worth a look, supplying the industry with slot machines and other gambling equipment. It yields 1.7%, but its payout fell 59% in 2009 and has yet to start growing again. It has added cloud-computing benefits to its offerings and has a lot riding on a gambling recovery in the U.S.
Some gambling companies, such as Shuffle Master (NASDAQ:SHFL) and Melco Crown Entertainment (NASDAQ:MLCO), don't pay dividends at all. That's because smaller or fast-growing companies often prefer to plow any excess cash into further growth, rather than pay it out to shareholders. Shuffle Master specializes in gaming machines and systems, and though it posted disappointing results recently, its revenue and earnings are growing, as is its gross margin. Some see more financially troubled municipalities legalizing gambling, which would bode well for Shuffle Master. Melco Crown is a much bigger company, operating casinos in Macau, where growth has been much more robust than in Las Vegas but has still slowed down recently.
As I see it, none of the main gambling stocks offer an extremely compelling combination of dividend traits. Many offer modest income right now and a chance of decent dividend growth, but you're likely to find even more attractive dividends elsewhere, such as in railroads or tobacco.
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. Just don't ignore the growth you can gain from powerful dividend payers.
Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, holds no position in any company mentioned. Click here to see her holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Ameristar Casinos. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.