We all know the story of the tortoise and the hare. In the investing world, our hares are represented by Rule Breakers-type stocks, and our turtles are ... dividend stocks. Though being a hare is much sexier, study after study has shown it's plenty wise to be a tortoise.
If anyone had a doubt about the power of dividends, they need only read Jeremy Siegel's The Future for Investors, where he writes: "Dividends matter a lot. Reinvesting dividends is the critical factor giving the edge to most winning stocks in the long run."
An important metric for dividends
The materials sector has several stocks that pay huge dividends. Today I'm going to introduce you to two that are worth your consideration -- and five that should be thrown out with the trash. While some people think the size of a dividend yield is all that matters, in reality, the yield just scratches the surface of what you need to investigate.
One of the most popular metrics for evaluating a dividend's health is the earnings payout ratio, which essentially measures the amount of earnings a company dedicates to paying out dividends. As the theory goes, the lower the payout ratio is, the more sustainable the dividend is.
The following table includes seven popular consumer goods stocks, listed by the size of their dividend yield, and including their payout ratio.
Source: Yahoo! Finance, dividendinvestor.com.
In their book Million Dollar Portfolio, David and Tom Gardner suggest that you should hold only stocks with a payout ratio of less than 65%. The largest dividends don't always make for the most sustainable ones.
This benchmark would make the cautious Fool worry about the sustainability of dividends from the likes of Southern Copper and Kronos Worldwide. Additionally, a closer look at Braskem's dividend shows that it is very choppy, being as high as $1.03 and as low as $0.02 over the past five years. Dividend investors, surely, don't like this kind of lumpiness.
But wait -- there's more!
I told you there'd only be two stocks worth looking at, and we still have four that haven't been eliminated.
This is where things get tricky. Knowing that your dividend is safe -- because of a low payout ratio -- isn't enough to supercharge your retirement portfolio. It also helps to know whether a dividend is growing. I like to look for stocks whose dividend is growing by at least 5% per year.
Because materials companies are heavily influenced by commodity prices -- something that's out of their control -- it's important to take the proper perspective when evaluating dividend growth.
Instead of looking at dividend growth over a one- or three-year period, I'm going to look at dividend growth over five years. Hopefully, this will allow us to iron out inconsistencies due to commodity prices:
5-Year Annualized Dividend Growth Rate
Wow! That really changes things for Olin and Dow Chemical. While Olin has been consistent in paying out its dividends, they haven't been raised in five years. And Dow was forced to cut its dividend by more than 60% after the economic downturn of 2008 -- from $1.68 per share to just $0.60. They haven't raised it since.
As promised, this leaves us with Steel Dynamics and Koppers as the two materials companies worth looking into for your dividend portfolio. Steel Dynamics is still dealing with the aftereffects of the recession, but reported recently that shipments of steel were up 15% last quarter when compared with 2010.
Koppers, which provides carbon compounds to a number of different industries, was able to increase net income 135% from 2009 to 2010 as demand for their products came back.
If you're looking for some dividend ideas, consider some names from a free report from The Motley Fool's expert analysts called "13 High-Yielding Stocks to Buy Today," including one that a senior retail analyst calls "the dividend play of a lifetime." Tens of thousands have requested access to this report, and today I invite you to download it at no cost to you. Get instant access to the names of these 13 high yielders. It's free!
Fool contributor Brian Stoffel does not own shares of any stocks mentioned. 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.