The Most Promising Dividends in Specialty Retail

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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 specialty retail 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 specialty retail
Below, I've compiled some of the major dividend-paying players in the specialty retail 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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United Online (NAS: UNTD) 7.7%(15.0%)67%Add
Barnes & Noble5.9%22.8%NMAdd
Brown Shoe3.3%7.3%40%Add
American Greetings (NYS: AM) 3.0%12.4%27%Add
Staples (NAS: SPLS) 3.0%10.9%30%Add
Luxottica Group1.6%11.5%35%Add
PetSmart (NAS: PETM) 1.4%34.5%23%Add
Tractor Supply (NAS: TSCO) 0.8%New dividend13%Add
Sotheby's0.6%(12.9%)8%Add
Winmark0.3%New dividend4%Add

Data: Motley Fool CAPS. NM = not meaningful due to negative earnings.

If you focus on dividend yield alone, you might end up with United Online and Barnes & Noble, but they're not necessarily your best bets. United Online sports a negative dividend growth rate, and Barnes & Noble has posted recent net losses, not net gains -- which doesn't bode well for being able to maintain a strong dividend.

Instead, let's focus on the dividend growth rate first, where Barnes & Noble and PetSmart lead the way. Their growth rates are so steep, though, that they will be hard to maintain for long -- especially for Barnes & Noble.

You may also notice that some notable players, such as ZAGG (NAS: ZAGG) and EZCORP (NAS: EZPW) , aren't on the list. That's because smaller, fast-growing companies often prefer to plow any excess cash into further growth, rather than pay it out to shareholders. Once they develop large, reliable income streams, though, watch out.

Just right
As I see it, among the companies above, Staples, American Greetings, and PetSmart offer the best combination of dividend traits, sporting some solid income now and a good chance of strong dividend growth in the future.

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. American Greetings, for example, has a negative revenue growth rate over the past few years. 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 for great dividend-paying stocks, read about"13 High-Yielding Stocks to Buy Today."



At the time this article was published Longtime Fool contributorSelena Maranjianholds no position in any company mentioned.Click hereto see her holdings and a short bio.Motley Fool newsletter serviceshave recommended buying shares of PetSmart, Sotheby's, and Staples. 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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