![]() ![]() The very highest payers often end up stretching to make payments beyond the company's ability to generate profits. This has been true over both short- and long-term holding periods. In fact, the second highest yielding group actually had the highest total return. The results show that the very highest-paying dividend stocks have historically not been the best performers. We conducted research at Heartland that ranked dividend payers into five groups based on levels of dividend yield. Intuitively, this preference for payouts over profits makes little sense for the long-term as, ultimately, a company can only sustain dividends if it is profitable. In fact, recent data from Bernstein Research shows that investor demand for high dividend yields means that company valuations are now more influenced by high dividend payout ratios than by high profitability. The income chase has driven up the price of stocks that pay the highest dividends. But beware of high market valuations and unsustainable yields. As investor frustration with low yielding traditional income-oriented investment vehicles like savings accounts, CDs, and Treasury bonds increases, looking at dividend-paying stocks as a way to generate or increase income makes sense.
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