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 processed and packaged consumer goods 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'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 packaged consumer goods
Below, I've compiled some of the major dividend-paying players in the processed and packaged consumer goods industry (and a few smaller outfits), ranked according to their dividend yields:
5-Year Avg. Annual
Mead Johnson Nutrition
Data: Motley Fool CAPS. *Past three years
Dividend investors typically focus first on yield. ConAgra Foods and B&G Foods (NYS: BGS) are among the highest-yielding stocks within this group. But they're not necessarily your best bets, as their dividends are not growing at rapid paces. Moreover, B&G Foods sports a payout ratio that's a bit on the steep side, suggesting that there may not be a lot of room for growth. Unlike others in the industry, B&G hasn't suffered from exposure to Europe's ailing economies, and has defended itself against rising commodity costs by locking in some prices early. However, unlike some of its peers, its organic growth has slowed recently.
Instead, let's focus on the dividend growth rate first, where Flowers Foods (NYS: FLO) leads the way, with a five-year average annual dividend growth rate in the mid to high teens. Flowers is growing effectively by buying smaller bakeries and adding them to its large distribution network, but some think it's risen so much lately that it's not a bargain at the moment.
Some packaged consumer goods companies, such as Green Mountain Coffee Roasters (NAS: GMCR) , 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. Green Mountain has been a darling among investors for quite some time, racking up huge average annual gains of 38% over the past decade. But it now faces expiring patents and lower expectations, and its stock has averaged 9% losses over the past two years.
As I see it, many of the above companies are attractive. But Flowers Foods and General Mills (NYS: GIS) offer the best combination of dividend traits, sporting some solid income now, and a good chance of strong dividend growth in the future. Both companies face rising costs due to drought conditions for important crops, but they also offer promise.
General Mills is huge and is working on getting huger via international expansion and new products. It introduced more than 100 new items worldwide in just its last quarter, and international sales grew by 27%. It has also been acquiring new brands, such as Yoplait, though management isn't pleased with its recent yogurt-related performance.
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.
You can find out more about Green Mountain Coffee Roasters by getting a copy of a special premium report on the company. It lays out the risks and rewards of investing in it, and comes with a year of free updates. Click here to learn more.
Editor's note: A previous version of this article failed to reflect the suspension of Diamond Foods' dividend, and mischaracterized B&G's exposure to Europe and to rising commodity costs. The Fool regrets the error.
The article The Most Promising Dividends in Packaged Consumer Goods originally appeared on Fool.com.
Longtime Fool contributor Selena Maranjian has no positions in the stocks mentioned above. The Motley Fool has the following options: long DEC 2012 $16.00 puts on Green Mountain Coffee Roasters and short DEC 2012 $21.00 calls on Green Mountain Coffee Roasters. Motley Fool newsletter services recommend Flowers Foods and Green Mountain Coffee Roasters. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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