Saturday, March 12, 2011

Best in Breed Dividend Stocks: The Chase for Yield (Part 4)

Today we are going to stray from the sector theme and address a question that has been raised by many readers:

Where’s the yield?

As I have stated in previous articles, I'm a dividend growth investor, not a yield chaser. I believe in investing in undervalued companies, with moderate dividend yields, good dividend growth rates, low payout ratios and long-term sustainable business models. For younger investors, a disciplined dividend growth Investing plan is a sure fire path to financial freedom.

That being said, there is something attractive about stocks with substantial dividend yields. The idea of gaining 6-14% annually on a stagnant investment is hard to pass up. The problem with these investments is yields as lofty as these are rarely sustainable. When the dividend goes, so does the multiple the market has placed on the stock. Most of the time, the dividends you’ve accumulated on these high yielders will pale in comparison to the stocks decline when the dividend is compromised.

Still, there is a place in a well diversified dividend portfolio for the companies with abnormally high yields. These high yielders help smooth out the yield curve of a portfolio and push it above the 3% minimum yield I use as my benchmark. This allows us to take on companies with smaller yields and high growth rates, while keeping the income flowing.

Before we get to the picks, I am going to forewarn you that many of the metrics you are accustomed to reading about in my articles, such as Return on Equity, Sustainable Growth, EPS Growth Rate, and Dividend Payout Ratio have little, or nothing to do with the companies we will discuss. This is part of the reason I don’t usually invest in these companies. I don’t invest in equities I can’t accurately value. Master Limited Partnerships, Real Estate Investment Trusts, ETFs, and the like, play by their own rules.

Read the rest of the article here

1 comment:

  1. So many investors are fooled into the notion that high yield means high return. What they fail to realize is more often than not a stock with a very high yield is much more likely to be a sign of trouble for the company paying the high yield rather than a sign of strong fundamentals.