The Most Promising Dividends in Business Equipment

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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 business equipment 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 whyyou'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:

  1. The current yield
  2. The dividend growth
  3. 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 business equipment
Below, I've compiled some of the major dividend-paying players in this industry (and a few smaller outfits), ranked according to their dividend yields:

Company

Recent Yield

5-Year Avg. Annual Div. Growth Rate

Payout Ratio

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Pitney Bowes (NYS: PBI) 6.7%3.3%101%Add
Diebold (NYS: DBD) 3.4%5.4%NMAdd
Kimball International3.2%(22.5%)143%Add
Steelcase2.3%(23.1%)60%Add
Knoll (NYS: KNL) 2.1%(26.9%)21%Add
Xerox (NYS: XRX) 1.7%0.0%*25%Add
Herman Miller (NAS: MLHR) 0.4%(22.6%)8%Add

Data: Motley Fool CAPS. NM = Not meaningful due to negative earnings.
*Past three years.

As you can see, many of these stocks have seen big dividend reductions in recent years. That makes Pitney Bowes and Diebold stand out from the crowd, although Diebold hasn't been profitable recently.

You may also notice that some major players in the industry, such as Verifone (NYS: PAY) and Coinstar (NAS: CSTR) , aren't on the list. Smaller, fast-growing companies often prefer to plow any excess cash into further growth, rather than pay it out to shareholders, but these aren't the tiniest of companies. Instead, Coinstar may be conserving its assets because of challenges to its Redbox business from the likes of Netflix, while Verifone's debt may prompt the company to keeping its options open with regard to its cash.  

Just right
As I see it, among the companies above, Pitney Bowes offers the best combination of dividend traits, sporting some solid income now and a good chance of some dividend growth in the future. But with a high payout ratio, it's still not the most attractive combination. You may find even more attractive dividends in sectors such as packaged consumer goods or oil refining.

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.

Do your portfolio a favor. Don't ignore the growth you can gain from powerful dividend payers.

To get more ideas for great dividend-paying stocks, read about"13 High-Yielding Stocks to Buy Today."

At the time this article was published Longtime Fool contributorSelena Maranjianowns shares of Netflix, but she holds no other position in any company mentioned.Click hereto see her holdings and a short bio.Motley Fool newsletter serviceshave recommended buying shares of and put options on Netflix. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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