So are dividends the secret sauce? Are dividends the best way to divine a stock’s future?
Lots of folks think so. We’ve discussed how steady and growing dividends can indicate financial health, commitment to investors, and provide a stable real income stream. So many folks have gotten the dividend bug that there are some 800 mutual funds with over $400 billion in assets that focus on a dividend strategy. So what’s not to like?
Well, like anything, you can have too much of a good thing. Dividends take cash away from the firm. If sales are growing, the company may need that cash to expand. If the dividend is too high, future earnings will suffer.
On the other end of the scale, companies in stable, highly regulated businesses, like utilities and telephones, often pay out most of their earnings in dividends. Normally there’s little risk in this, but if the competitive or regulatory climate changes, those dividends may be cut.
But just because a corporation hasn’t begun to pay or has a fairly generous payment doesn’t mean it’s inappropriate or appropriate for you. What suits you depends on what you’re looking for. Long-term growth? Stability in the face of uncertainty? An improving real income stream? The best way to evaluate an investment is first to evaluate yourself.
When it comes to investing, you need all kinds of ingredients. There is no secret sauce.
Douglas R. Tengdin, CFA
Chief Investment Officer
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