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 technical services 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 technical services
Below, I've compiled some of the major dividend-paying players in the technical services industry (and a few smaller outfits), ranked according to their dividend yields:
5-Year Avg. Annual Div. Growth Rate
Data: Motley Fool CAPS
NM = Not meaningful due to negative earnings
*Past four years
Dividend investors typically focus first on yield. SAIC (NYS: SAI) sports the heftiest yield above, but it's not necessarily your best bet. Like many of the others, its dividend it too new to have much of a growth track record, and its net income has been net losses lately. The eighth-largest government contractor lost its biggest federal contract earlier this year, worth up to $4.6 billion, to Lockheed Martin (NYS: LMT) . It's not all bad news, though, as SAIC is still inking contracts, such as one worth up to $36 million with the U.S. Air Force. The company plans to break itself in two, and reorganize.
Some technical services companies, such as AECOM Technology (NYS: ACM) and Engility Holdings (NYS: EGL) , 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. AECOM, a planning and construction consulting firm, sports a market capitalization near $2.5 billion. It carries significant debt, but has been racking up new contracts and generating free cash flow with which to pay down that debt. Government services contractor Engility is much smaller, with a market cap around $300 million. It was spun off from L-3 Communications (NYS: LLL) and is threatened by possible reductions in government and military spending.
As I see it, Brady (NYS: BRC) and KBR (NYS: KBR) offer the best combination of dividend traits in the table above, along with strong ratings in our CAPS community. Brady, for example, does have a dividend growth track record, and a decent one, at that. KBR's payout is tiny now, but its earnings are positive, at least.
For even more attractive dividends, check out our special free report outlining nine top dependable dividend-paying stocks. It's called "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 Technical Services 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 L-3 Communications Holdings and Lockheed Martin. 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.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.