Helping Dividend-Oriented Investors Make Better Decisions

Wellington Management, in its analysis, offered some insight that can help dividend-oriented investors make better decisions. The research found that many of the first quintile, or highest-yielding dividend stocks, had higher dividend-to-earnings ratios, making it more difficult to sustain their dividends, let alone grow them, especially if earnings weakened. Many investors view dividend reductions as a sign of weakness, one that often coincides with the decline in the price of a company's stock. Inadvertently, they create their own fiscal cliff for stockholders.

Stocks in the second quintile tended to have lower dividend-to-earnings ratios, allowing more flexibility to maintain or increase their dividends over time. It should also be noted that Ned Davis Research, in a separate study earlier this year, reported that the ability to maintain or grow dividends over time may be regarded as a sign of company strength-one that is often rewarded by investors relative to companies that reduce or eliminate their dividends.

Source: On Wall Street

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