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 metal-mining 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 metal mining
Below, I've compiled some of the major dividend-paying players in the metal-mining industry (and a few smaller outfits), ranked according to their dividend yields.
5-Year Average Annual Dividend Growth Rate
Freeport McMoRan Copper & Gold
Cliffs Natural Resources
Data: Motley Fool CAPS.
If you focus on dividend yield alone, you might end up with Southern Copper, but it's not necessarily your best bet. Its dividend growth rate is negative and its current payout ratio tops 100%.
You may notice, too, that some significant miners aren't on the list. Thompson Creek Metals
As I see it, BHP Billiton and Rio Tinto give you the best of everything for a dividend stock. They sport yields close to 2%, hefty dividend growth rates, and reasonable payout ratios. They all offer some income now and a good chance of strong dividend growth in the future. If you're more interested in collecting a significant yield now, take a closer look at Southern Copper. 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 of great dividend-paying stocks, read about our 13 High-Yielding Stocks to Buy Today..
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Longtime Fool contributor Selena Maranjian owns no shares of any companies mentioned in this article. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.