By MarketWatch. Don't miss these top money and investing features: Savvy investors know that an attractive dividend is worthless if the company might not be able to continue paying it. So be wary of unusually high yields from stocks — and the mutual funds and ETFs that buy them. Stretching for yield can be dangerous. A stock’s yield can be high because the share price is low, and a shareholder runs the risk that the dividend could be cut or eliminated.
In any event, it’s likely that a stockholder won’t see any dividend growth — and that’s the ball game in this yield-hungry world of ours. Companies that can grow dividend payments over time are being rewarded for being shipshape stewards of capital. These firms generate enough cash not only to cover the current dividend, but also have room to boost the payout as the business expands. An investor here gets the best of both worlds: predictable, growing income and the strong potential for share-price appreciation.
Finding these companies involves a simple calculation of the dividend-payout ratio. Typically you would divide dividends paid by net income, but there’s a better way that gives an even more accurate picture: cash flow. ... Continue to read.
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