The Most Promising Dividends in Agricultural Products

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 agricultural industry offer the most promising dividends.

Yields and growth rates and payout ratios, oh my!
Before we get to those companies, 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 agricultural products
Below, I've compiled some of the major dividend-paying players in the agricultural products industry (and a few smaller outfits), ranked according to their dividend yields:

Data: Motley Fool CAPS. 

Dividend investors typically focus first on yield. Argentinean company Cresud is the highest-yielding stock in the bunch, but it's not necessarily your best bet, as it has been paying out just about all its income in dividends. (On the plus side, its earnings have trended up sharply  recently, despite dealing with a difficult political environment  locally.)

Instead, let's focus on the dividend growth rate first, where Cal-Maine Foods (CALM -1.89%), The Andersons (ANDE -0.49%), and Monsanto (MON) lead the way. Their growth rates are so steep, however, that they may be hard to maintain for long. Still, each has a low payout ratio, making that far from an immediate concern. Seed and herbicide giant Monsanto has been enjoying relatively fat profit margins and grabbing even more market share from rivals. It seems perpetually mired in controversy, though, for its genetically modified seeds and opposition  to regulations requiring labeling of genetically modified items. The company posted very strong  quarterly earnings recently, in part due to strong Latin American demand and high food prices.

Some agricultural companies, such as Darling International (DAR -1.27%) and Adecoagro S.A. (AGRO 1.03%), 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. Food recycler Darling faces the prospect of low finished-product prices, which could put pressure on earnings. Indeed, in its last quarter, both revenue and earnings were down.

Adecoagro has been dealing with drought, but it's poised to profit from Latin America's faster-growing economies. It has been popular with some hedge fund managers such as George Soros. Its crops are diversified, but still subject to weather conditions.

Just right
As I see it, Archer Daniels Midland (ADM 2.15%) and Syngenta AG (NYSE: SYT) offer the best combination of Fool community support and attractive dividend traits, sporting some solid income now and a good chance of strong dividend growth in the future. Archer Daniels has been hurt some by volatility in food prices, such as in corn and cocoa. Drought conditions in America's farm belt will likely make things worse, with ADM's Crop Risk Services unit likely to see claims rise. (Droughts affect water levels, too, pressuring barge capacities, which hurt commodity shippers.) One boost to business in recent years has been the use of corn for ethanol, and the government's QE3 stimulus should boost agricultural spending as well.

Switzerland-based Syngenta, the world's third-largest seed producer, is acquiring  U.S.-based Sunflower Seeds (an oil producer), and is divesting  itself of its horticultural distribution and brokerage business, focusing more on its genetics and plant protection work.

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.