Do Your Homework Before Buying High Dividend Stocks

Advisers warn that investors should not to be so tempted by the allure of fat yields that they overlook two fundamental questions: How safe is the dividend, and does the company have the wherewithal and inclination to increase it in the future? "Looking at pure yield is not going to give them all the information they need," said Tom Huber, who manages T. Rowe Price's $1.9 billion Dividend Growth Fund (PRDGX).

Fund managers who specialize in dividend stocks say a better measure of a company's ability to maintain and increase its dividend is its free cash flow, essentially the cash a company generates minus what it spends. "I'm looking at free cash flow," said Daniel Peris, co-manager of Federated Investors' $3.2 billion Strategic Value Dividend Fund (SVAIX). Mr. Peris also looks at a company's dividend history and gauges the willingness of a company to pay a dividend regularly and increase the payout over time.

Source: Pittsburgh Post Gazette

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