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 vehicle parts 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 vehicle parts and accessories
Below, I've compiled some of the major dividend-paying players in the vehicle parts and accessories industry (and a few smaller outfits), ranked according to their dividend yields:
5-Year Avg. Annual Div. Growth Rate
Superior Industries International
Standard Motor Products
Allison Transmission Holdings
Monroe Muffler Brake
Source: Motley Fool CAPS .
Dividend investors typically focus first on yield. Douglas Dynamics (NYS: PLOW) is the highest-yielding stock on the list, but it's not necessarily your best bet. For one thing, its dividend is fairly new, so there isn't enough of a growth track record to assess. It's also currently paying out more than its net income, suggesting that the payout won't be sustainable unless earnings rise.
Instead, let's focus on the dividend growth rate first, where Magna International (NYS: MGA) and Monroe Muffler Brake (NAS: MNRO) lead the way, with five-year average annual dividend growth rates of 25% and 24%, respectively. Those rates are so steep, though, that they may be hard to maintain for long. Both sport low payout ratios of 24%, though, making that far from an immediate concern.
The list features some big, familiar names, such as Johnson Controls (NYS: JCI) and Honeywell (NYS: HON) . Both recently yielded 2.5% or more, and Johnson Controls sports an appealing five-year dividend growth rate average of nearly 14%. Johnson Controls, paying dividends since 1887, has suffered from weak battery sales lately, as Americans have been hanging on to cars longer before buying new ones. A weak euro and strong competition also haven't helped, but it's expanding in China, is developing hybrid batteries, and is boosting its capacity.
Some fear that cutbacks in government and military spending will hurt Honeywell (NYS: HON) , but its commercial promise seems strong, with a hefty backlog of orders for planes and the automotive industry getting healthier. The company offers great diversification -- it's looking to make natural-gas acquisitions, for example -- and that can be a plus or a minus, depending on how much you really want to focus on the auto industry.
It's good to look beyond the familiar names, though, as smaller companies can sometimes be more compelling. Gentex (NAS: GNTX) , for example, is cash-rich and debt-free, with double-digit revenue and earnings growth rates. Its price seems attractive, too, with its P/E ratio below its five-year average -- though gross margins have shrunk. Dana Holding (NYS: DAN) , meanwhile, has been seeing its margins grow. It offers great diversification across passenger and commercial vehicles, and has much potential, with Stephen Simpson at Investopedia.com suggesting that it might profit well by convincing more carmakers to let it manufacture more parts.
Some companies, such as TRW Automotive Holdings (NYS: TRW) ,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. TRW isn't young or tiny, though, founded in 1904 and with a market capitalization above $5 billion. The company recently hit a 52-week high and got a big bump on announcing plans to buy back some 17% of the company's stock. Shrinking a company's share base is another way to reward shareholders, other than via a dividend. The announcement has some thinking that a pullback in European auto spending might not be as bad as expected, since TRW does a lot of business there.
As I see it, Johnson Controls and Honeywell offer the best combination of dividend traits, sporting some solid income now and a good chance of strong dividend growth in the future. Others on the list, such as Lear (NYS: LEA) , are also worth a closer look. Lear's dividend is new and relatively low, but it rose 12% over the past year, and the stock is rated very highly in our CAPS community.
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.
There are plenty of great dividends outside the auto parts sector. Learn about some of them in our special free report, "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can access your copy today at no cost -- just click here to discover the winners we've picked.
The article The Most Promising Dividends in Vehicle Parts originally appeared on Fool.com.
Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, has no positions in the stocks mentioned above. The Motley Fool owns shares of Gentex, Standard Motor Products, and Superior Industries. Motley Fool newsletter services recommend Autoliv and Douglas Dynamics. 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.