When it comes to dividends, many of us understand how powerful they can be -- sometimes making up a huge chunk of the overall return of the market or a particular stock. We also tend to associate dividends with the usual suspects -- big, familiar blue-chip stocks. That's fine, but if you dig a little deeper, you may find yourself surprised by scores of less well-known companies with impressive dividend-paying track records.
Never heard of them...
Some are surprising simply because they're not familiar to many of us. Waste Management
We know all the major U.S. telecom providers, but most of us don't know Telefonica
Then there's Teva Pharmaceutical
The wrong industry
Other significant dividend payers are surprising because they just don't come to mind as promising portfolio candidates in this troubled economy. Consider Fastenal
Another contender is Caterpillar
Food distribution giant Sysco
The big picture
As you evaluate dividend candidates for your portfolio, be sure to look at more than their string of dividend increases. Look, for example, at their dividend growth rate. A company raising its dividend for 40 years in a row is impressive, but if the actual annualized growth rate over the past few years has been 2%, that's not so wonderful. Check payout ratios, too, to make sure a company isn't paying out more than it earns.
With the companies above, for example, Universal Forest Products sports a five-year dividend growth rate of 29.5%, but its payout ratio is 125%. Fastenal's growth rate is slower, at 20.6%, but its payout ratio is just 63%. Like Fastenal, Teva Pharmaceutical may not seem to have the most attractive dividend, with a yield of around 2%. But its growth rate is near 25%, and the stock has a payout ratio of just 22%, so that yield may grow fast. The big picture matters.
Longtime Fool contributor Selena Maranjian owns shares of Teva Pharmaceutical Industries, but she holds no other position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of Waste Management, Telefonica, Universal Forest Products, and Teva Pharmaceutical Industries. Motley Fool newsletter services have recommended buying shares of Teva Pharmaceutical Industries, Waste Management, and Sysco, as well as writing a covered strangle position in Waste Management.
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