For a long time many growth investors have been in one of two camps regarding dividends. On one side are investors who believe that a penny issued as a dividend is a penny that can’t be used to fuel expansion. And when we see companies beginning to issue dividends, the argument goes, that’s often because they don’t have a better use for earnings and are running out of ways to grow.
On the other side are those who appreciate dividends because they offer a steady stream of income, are good corporate governance (you can’t pay out dividends with fake earnings), provide an incentive for management to continue generating earnings and have other benefits.
In the most recent meeting of the magazine’s Editorial Advisory and Securities Review Committee, members suggested that dividends are a good thing, but investors should set parameters on their dividend investing.
First, be wary of any stocks issuing outrageously high yields. Though REIT stocks and similar instruments have legitimate reasons for high yields, other stocks have offered double-digit yields that aren’t sustainable over the long term. Ask yourself where the money is coming from when you see extremely high payouts.
A better foundation, committee members say, is a long-term history of dividend growth, with dividends currently at a more moderate yield of, say, 2 percent or so. These parameters certainly are more in keeping with BetterInvesting’s philosophy, as they focus on management capability and allow companies to continue expanding operations as well as their dividends.