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 food 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:
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' 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 food
Below, I've compiled some of the major dividend-paying players in the food industry (and a few smaller outfits), ranked according to their dividend yields:
5-Year Avg. Annual Div. Growth Rate
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B&G Foods (NYS: BGS)
H.J. Heinz (NYS: HNZ)
Campbell Soup (NYS: CPB)
General Mills (NYS: GIS)
McCormick (NYS: MKC)
Data: Motley Fool CAPS. NM = Not meaningful due to negative earnings. * Denotes past four years.
If you focus on dividend yield alone, you might end up with B&G Foods and ConAgra, but they're not necessarily your best bets. Their dividend growth rates are unattractively low.
You should be careful with steep dividend growth rates, too, as huge ones will be hard to maintain for long, especially if the payout ratio is on the high side. That isn't a problem with this bunch, though.
You may notice, too, that some notable players in the industry, such as Smart Balance (NAS: SMBL) and SunOpta (NAS: STKL) , 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.
As I see it, among the companies above, Heinz and Campbell Soup offer the best combination of dividend traits, sporting some solid income now and a good chance of strong dividend growth in the future. If you want maximum income now, B&G Foods is a good bet. And General Mills is also appealing, with its robust growth rate. Remember, too, that you may find even more attractive dividends elsewhere, such as in 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. 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.
Looking for someAll-Star dividend-paying stocks? Look no further.
At the time thisarticle was published LongtimeFool 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 McCormick, Kellogg, H.J. Heinz, and Unilever. 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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