Dividend Yields Should Be a Lot Higher

Dividend investing has always been popular, but it became an absolute necessity for millions of investors in the low interest rate environment we've seen for years. Yet now that rates on bonds and other fixed-income investments have started to rise, the big question is whether interest in dividend stocks will start to wane. For income-hungry investors, yields matter most. So for dividend stocks to hold their own in the stocks vs. bonds battle, they'd need to provide bigger payouts. Fortunately, for many companies, boosting the amount of their dividends not only wouldn't be a problem but arguably should already have happened.

For some companies, paying out the majority of their earnings in dividends doesn't make sense. If a company is still growing, it's easier to hold onto retained profits and cash flow rather than paying it to shareholders and having to turn to the credit markets to raise capital. Yet for the more mature companies in the Dow, that argument is harder to support. Growth prospects are a lot weaker for most of the Dow's industry giants, leaving them with less need for retained capital. A boost in payouts from 38% just to 50% would push the Dow's overall yield to 3.2%, sending it back above the current rate on 10-year Treasuries.

Source: Motley Fool

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