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. As the housing market is finally showing some signs of recovery, let's see which companies in the surety and title insurance business 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 surety and title insurance
I've compiled some of the major dividend-paying players in the surety and title insurance industry (and a few smaller outfits), ranked according to their dividend yields:
5-Year Average Annual Dividend Growth Rate
Old Republic International (NYS: ORI)
OneBeacon Insurance Group (NYS: OB)
Assured Guaranty (NYS: AGO)
Fidelity National Financial (NYS: FNF)
First American Financial
Stewart Information Services
Radian Group (NYS: RDN)
Data: Motley Fool CAPS.
*Past two years.
NM = Not meaningful because of negative earnings.
Dividend investors typically focus first on yield. Old Republic International leads on that count, but it's not necessarily your best bet. In recent years, for example, it has lost far more than it has earned, and its dividend isn't growing particularly briskly, either. Still, insiders have bought a bunch of shares, which is encouraging, and folks at Raymond James upgraded the stock, finding it less likely that Old Republic's main mortgage-insurance unit will be forced into receivership.
Instead, let's focus on the dividend growth rate first, where OneBeacon Insurance Group is a leader. But note that it's currently paying out more than it's earning. That's not sustainable, and even with a modest boost in earnings, there's not a lot of room for further rapid growth.
Meanwhile, Radian Group offers a useful lesson in why investors need to pay attention. If you invested in Radian Group in 2001 after it bumped its dividend up by 33%, from $0.015 quarterly to $0.02, you would have been left with $0.003 quarterly in 2008, after an 85% cut. Worse still, the payout hasn't been increased since then. Radian, like others, got whacked by liabilities tied to insurance policies, but it has reduced its risk exposure by selling its municipal bond insurance unit to Assured Guaranty.
Some surety and title insurance companies, such as MGIC Investment (NYS: MTG) and MBIA (NYS: MBI) , 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. MGIC is relatively small, with a market capitalization near $400 million. It recently surged 36% in a week on news of healthier mortgages, but that may have been an overreaction. My colleague Rich Duprey, for instance, questions the company's health and prospects. With a market cap near $2 billion, MBIA is embroiled in legal wrangling, suing Bank of America (NYS: BAC) over allegedly misrepresented risky loans originating with Countrywide Financial, and also settled a class action suit over alleged improper accounting practices.
As I see it, Fidelity National Financial and Assured Guaranty offer the best combination of dividend traits, sporting some solid income now and a good chance of dividend growth in the future. Assured Guaranty is a major player in bond insurance and appears undervalued at recent levels. Fidelity National Financial may not seem enticing given its five-year average dividend growth rate, but a closer look shows the payout zigzagging and recently rising by 17% . It also sports the highest bullishness score in the group from our CAPS community of investors, and its revenue and earnings have been growing in recent years. Along with its peers, it's poised to benefit from a proposed rule from the Consumer Financial Protection Bureau.
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 other compelling dividend payers out there. Learn about nine 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 Surety and Title Insurance 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 Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.