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Part of the allure of dividend paying stocks is that they pay back your initial investment directly. Are any of the stocks in the service sector attractive to income investors who wish to be paid back without having to sell their shares in the secondary market?

Calculating Payback Periods

The number of years it takes for an investment to pay you back is called the payback period. It is a simple and crude measure of risk. Other investment metrics like required return do not always match up to the calculated payback period. This is because required return takes into account how dividend distributions in earlier years are worth more than the same dollar value paid out in the future. (You would be able to reinvest the earlier distribution and earn a return on it, making earlier distributions worth more.)

Since many dividend investors are attracted to high-paying dividend companies on the premise that they can ignore what the markets do and simply focus on their dividend income, the payback period provides a reality-check for how long payback based on dividend payments could take.

Payback period estimates depend on earnings growth and dividend payout ratios. Payout ratios were assumed constant, and dividend yield was projected by taking the minimum of the following:

- Earnings growth over the past five years

- Analyst estimates for earnings growth for the next five years

- Return on equity times the earnings reinvestment rate

The minimum of these measures was then used to estimate dividend growth for the next three years.

Service sector stocks were screened for dividend payback within two decades, dividend yields in excess of the 10-year treasury yield and payout ratios below 60%. The values of these inputs are provided below:

Ticker

Company

Dividend Yield

Payout Ratio

EPS growth past 5 years

EPS growth next 5 years

AM-OLD

American Greetings Corp.

3.7%

0.2837

11.6%

10.0%

ASR

Grupo Aeroportuario Del Sureste SA de CV

3.7%

0.4836

21.6%

8.5%

AYR

Aircastle LTD

4.7%

0.3023

10.5%

10.0%

BOX-OLD

SeaCube Container Leasing Ltd.

6.2%

0.4753

0.0%

5.0%

CMRE

Costamare Inc.

7.0%

0.7022

-11.2%

9.5%

DEG

Etablissements Delhaize Freres et Cie Le Lion S.A.

4.8%

0.2845

8.3%

2.8%

DEST

Destination Maternity Corporation

3.8%

0.461

16.6%

14.0%

DLX

Deluxe Corp.

4.2%

0.3556

7.4%

6.3%

ELRC

Electro Rent Corp.

4.4%

0.6527

2.8%

15.0%

ENL

Reed Elsevier NV

4.9%

0.6979

-0.7%

4.3%

FUN

Cedar Fair, L.P.

5.4%

0.767

-4.1%

6.0%

HRB

H&R Block, Inc.

4.7%

0.4764

8.6%

11.0%

INTX

Intersections Inc.

6.3%

0.5537

2.9%

10.0%

MDP

Meredith Corp.

4.5%

0.4414

0.0%

9.7%

NM

Navios Maritime Holdings Inc.

5.5%

0.599

-0.5%

16.0%

PAYX

Paychex, Inc.

4.0%

0.8403

3.1%

10.6%

RSH

RadioShack Corp.

7.6%

0.7392

3.8%

4.5%

RUK

Reed Elsevier plc

4.0%

0.6442

3.0%

4.0%

SB

Safe Bulkers, Inc.

8.7%

0.474

-6.3%

5.0%

SFL

Ship Finance International Limited

7.7%

0.8843

-5.9%

-1.8%

SJR

Shaw Communications, Inc.

4.6%

0.5258

3.3%

8.6%

STRA

Strayer Education Inc.

4.0%

0.4631

19.7%

8.0%

SYY

Sysco Corp.

3.6%

0.5366

7.8%

6.6%

TAL

TAL International Group, Inc.

6.0%

0.5954

21.5%

11.5%

TGH

Textainer Group Holdings Limited

4.2%

0.3509

21.1%

12.0%

UNTD

United Online, Inc.

8.3%

0.571

-2.0%

15.0%

WSTG

Wayside Technology Group, Inc.

4.5%

0.5443

10.7%

22.0%

Abnormal growth will not last forever, and analyst estimates, as informed as they are, are not predictive indefinitely. To address this limitation, a terminal 3% dividend growth rate was applied for every stock in the list after three years of projected growth rates. (Predicting economic growth many years out is impossible, and 3% seemed like a reasonable value.)

Many service sector stocks have distribution rates which are high enough that the sum of future dividends would equal your initial investment inside of two decades:

Ticker

Industry

P/E

P/B

Return on Equity

Payback Period

AM

Specialty Retail, Other

8.14

0.81

11.1%

18

ASR

Air Services, Other

17.11

1.75

10.5%

19

AYR

Rental & Leasing Services

7.79

0.65

8.9%

16

BOX

Rental & Leasing Services

8.58

1.54

19.1%

14

CMRE

Shipping

10.66

2.83

25.3%

17

DEG

Grocery Stores

7.2

0.78

11.3%

17

DEST

Apparel Stores

12.18

2.64

23.4%

16

DLX

Business Services

8.57

4.03

54.4%

17

ELRC

Rental & Leasing Services

16.68

1.76

10.8%

18

ENL

Publishing - Periodicals

15.94

4.95

35.8%

18

FUN

General Entertainment

23.2

10.38

48.8%

18

HRB

Personal Services

12.71

6.17

50.4%

15

INTX

Consumer Services

11.88

2.07

18.7%

13

MDP

Publishing - Periodicals

13.03

1.91

15.4%

18

NM

Shipping

11.76

0.42

3.9%

16

PAYX

Staffing & Outsourcing Services

21.36

7.4

35.8%

19

RSH

Electronics Stores

10.34

0.87

8.4%

12

RUK

Publishing - Periodicals

16.45

5.77

36.9%

19

SB

Shipping

5.29

1.47

31.2%

13

SFL

Shipping

9.43

1.45

16.1%

14

SJR

CATV Systems

12.71

2.55

22.2%

17

STRA

Education & Training Services

11.38

28.03

97.2%

17

SYY

Food Wholesale

15.19

3.69

26.4%

19

TAL

Rental & Leasing Services

11

2.19

22.1%

12

TGH

Rental & Leasing Services

9.25

2.52

29.9%

15

UNTD

Specialty Retail, Other

8.64

0.9

10.6%

12

WSTG

Computers Wholesale

11.88

2.31

19.9%

15

Conclusion

If you want to ignore what prices your securities fetch in the markets, you will be waiting a long time to get paid back. Since all the dividend service sector stocks would require more than a decade for payback, investors should rethink a singular focus on dividends before investing in the service sector.

What can dividend investors do with these stocks? Since they cannot "buy, forget, and cash the check" they are stuck considering total return including capital appreciation. Fortunately, many of these stocks offer compelling low price-multiples, which are promising for future stock prices. However, to avoid value traps, investors should weigh how cheaply these dividend-paying stocks are trading against measures of quality. In short, prudent investment for income requires more than reading a stock's yield.

Disclaimer: This article was written to provide investor information and education, and should not be construed as investment advice. I have no idea what your individual risk, time-horizon, and tax circumstances are: please seek the personal advice of a financial planner. This article uses third-party data and may contain approximations and errors. Please check estimates and data for yourself before investing.

Source: Service Sector Dividends: Waiting For Payback