5 Above-Average S&P Dividends With Room to Grow

The S&P 500 (INDEX: ^GSPC) is an index of 500 large-cap common stocks traded in the United States. The index is often used to track the overall economy as a whole and is often the benchmark that stock performance is measured against.

With that in mind, I went looking for some dividend payers among the stocks of the S&P 500, but I wasn't looking for the highest yield. I went looking for a combination of things. First, I tried to identify what the average dividend on the index would be. At the end of 2011, the average S&P dividend checked in at just over 2%. The second criterion I used was dividend payout ratios, looking for companies that have some earnings growth to grow dividends. I limited my search to those companies with a payout ratio below 20%.

My screen returned 16 companies. I've narrowed the list to the top five based on yield:

Company

Sector

P/E

Dividend Yield

Payout Ratio

Lexmark International Technology 8.5 2.8% 5.5%
Huntington Bancshares (NAS: HBAN) Regional banks 9.9 2.8% 16.9%
Marathon Petroleum (NYS: MPC) Oil and gas 5.0 2.6% 13.3%*
L-3 Communications (NYS: LLL) Aerospace/defense 8.0 2.6% 19.9%
Valero Energy (NYS: VLO) Oil and gas 6.0 2.6% 5.1%

Source: FinViz.com. *Based on dividend versus trailing-12-month EPS.

Printing leader
Lexmark, maker of printers and printing accessories, is a relatively new dividend payer, which helps put its low payout ratio in perspective. The company announced its dividend in October, with the first regular payout in November. But with an attractive P/E, an investor can get in on the ground level of its dividend, which I expect to have plenty of room to grow for the foreseeable future.

Regional bank powerhouse
Huntington Bank is considered one of the stronger regional banks, recovering throughout 2011 from damage from the 2009 financial meltdown. While its current dividend is nowhere near where it was pre-crisis, its low current price keeps its yield near 3%. As with most banks that received Troubled Asset Relief Program money, it will have to pass certain stress tests in order to raise its dividend further, but any further recovery in the banking industry bodes well for its future dividend growth.

New petroleum refiner
Another new dividend is paid by Marathon Petroleum, which was spun off from Marathon Oil early in 2011. Its first dividend was $0.20 a share in August 2011; this was raised to $0.25 a share by the time it made its second quarterly dividend payment. The company has been expanding its capacity, giving it an opportunity to process petroleum from various sources. With earnings per share expected to grow at 37% over the next five years, the stock may have it all, and growing earnings could equal growing dividends.

Defense = dividends
Unlike some others on the list, L-3 Communications has actually been growing its dividend since it started paying it in 2004. Despite looming financial cuts, its dividend is safe based on factors beyond its low payout rate. Combine that with a low P/E, even when looking at its five-year P/E, and you have an opportunity to buy one of the cheapest stocks in the S&P 500.

Another petroleum refiner
Valero is another refiner, but it has a longer history than Marathon. Its dividend history has been relatively stable, with the company having paid a dividend consistently since 1989 -- although the refiner only recently restored its payout to its 2009 level. Valero was subject to buyout rumors in the fall of 2011, and if those types of overtures occur again, investors could make money that way as well. Combine that with the lowest payout ratio on the list, and it could see some growth ahead in its dividends.

What it all means
Companies often have various reasons for keeping dividend payout ratios low, and it isn't a requirement for them to return income to shareholders at all. When I see companies that are paying dividends and low payout ratios, however, I like to take a look to see if there might be some growth ahead for the dividend. If you are interested in some other dividends, we have a new free report that provides some options to help "Secure Your Future With 11 Rock-Solid Dividend Stocks." Get your copy today!

At the time this article was published Fool contributor Robert Eberhard holds no position in any company mentioned. Follow him on Twitter. The Motley Fool owns shares of L-3 Communications and Huntington Bancshares. Motley Fool newsletter services have recommended buying shares of L-3 Communications. 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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