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 life insurance 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 with 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 life insurers
Dividend investors typically focus first on yield. Sun Life Financial (SLF 0.39%) and Manulife Financial (MFC 1.14%) are among the highest-yielding stocks in life insurers, recently offering 6.2% and 4.3%, respectively. But they're not necessarily your best bets. Both have seen their bottom lines turn from black to red in the past year. Sun Life has turned in some promising results over the past year, and is expanding in Asia, but its last quarter was disappointing. Still, management pointed out 35% growth in China, 74% growth in the Philippines, and successful cost-cutting.

While others have exited the variable annuity business, Manulife has restructured its annuity operations, limiting its distribution channels, and is expanding into private wealth management. As baby boomers age, Manulife and other long-term-care insurance providers should see more business.

If in your search for great dividends you focus on the dividend growth rate first, you'll notice Prudential Financial (PRU 1.15%), with a five-year average annual dividend growth rate of 9.8%. The company has posted some derivatives-related losses, but it holds plenty of promise, particularly from its fast-growing business in Asia. (Asia generated 30% of the company's profits last year.) Prudential recently bought the life insurance business of Hartford Financial for $615 million and has been targeting Japan, which sports the second-largest life-insurance market.

Be careful as you seek dividend growth, though. A quick glance at five-year averages will reveal nothing for Primerica (PRI 1.67%), which sported a yield of only about 1% recently. There's no five-year average, because it began paying dividends in 2010. In just the past two years, though, that quarterly dividend soared from $0.01 to $0.07. So while the current yield is slim, it looks like it might grow rather rapidly. Primerica has been beefing up its licensed sales force recently, and its new fixed annuities have been selling well.

Some companies, such as Genworth Financial (GNW 1.37%), 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. At some companies, management simply believes it has more critical uses for its cash. Genworth, which stopped paying a dividend after 2008, has been struggling recently, partly because of low interest rates, the lackluster economy, and a sluggish housing market. But there were hints of a recovering mortgage market, when it reported a strong jump in insurance-policy volume. Some competitors have exited the long-term-care market, which leaves Genworth in a stronger position, as long as it's pricing its policies effectively. Some see the stock as a bargain, with a recent P/E ratio of 8 and a forward P/E of 4.

Just right
As I see it, Sun Life Financial and Manulife offer the best combination of dividend traits, sporting some significant income now and a good chance of solid dividend growth in the future. Manulife's dividend growth rate has not been impressive lately, but these have been challenging times for insurers. Other insurers, such as Symetra Financial and American National Insurance, are also worth a look.

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.

If you're looking for financial security, as insurance purchasers typically are, check out our eye-opening report outlining three stocks that can help you retire rich. It won't be available forever, so get your free copy today.