David I. Templeton

Beware 'Dividend Aristocrats' that Actually Offer Low Yields, No Real Income

One key to focusing on dividend growth stocks is the disciplined used in selecting these types of investments. It is not so much the yield one should look at but the dividend growth characteristics of the company.

Companies that grow their dividend every year feel compelled to maintain this growth in good times and bad. This enables an investor to look at other financial factors of the company that might signal company operating problems going forward. For example, if a company is using debt to maintain the dividend growth, the debt ratios may get out of whack. Additionally, looking at the payout ratio might signal earnings issues in the near term.

So using a dividend growth process enables investors to uncover potential problems that may be on the horizon; thus enabling an investor to may be exit the stock before a price decline in the future. Blindly investing simply for income by looking at high yielders can be a recipe for disaster. These high yielders may have business issues which result in stock price depreciation or a future dividend cut.