To Find A Good Dividend Stock, You Have To Go Beyond The Dividend

STOCKS have made investors money for four years, but they have also made them nervous. Bonds have been a profitable alternative, but prices are so high that there could be risk in this presumed haven, and in any case yields are near record lows. A popular third choice, stocks that pay big dividends, offers elements of both types of assets: growth prospects and regular income that is often higher than that of high-quality bonds. High-yield stocks have been valuable portfolio holdings for many decades. Research by Eugene F. Fama of the University of Chicago and Kenneth R. French of Dartmouth has found a strong correlation between a stock’s total return and its dividend yield.

“In order to find a good dividend-paying company, you have to go beyond the dividend,” said Robert Shearer, manager of the BlackRock Equity Dividend fund. A company has to have sufficient profits not just to pay the latest dividend, he explained, but also to expand the business so that it can pay future dividends, preferably in successively higher amounts. “If companies don’t have cash to invest in the business,” he said, “they won’t have it to grow dividends, either.” The ability to increase dividends is an advantage that stocks have over bonds.

Source: New York Times

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