Sunday, September 19, 2010

Is dividend yield, an investment topic, long out of style, now back in fashion>

As structural changes are reshaping the global economy, significant changes are taking place among investors about their strategies as well. Driving these changes are 1) concerns about persistent equity market volatility 2) how lower economic growth may limit the potential for stock price appreciation, 3) the impact of declining interest rates on investment portfolios and 4) the potential for increase risk aversion as many investors move toward retirement. In an environment where investors are interested in "what CAN you do for me?" rather that "what MIGHT you do for me?"

investments that provide hard cash to shareholders in the form of dividend payouts has increased appeal. To provide additional context to the dividend yield topic, please consider the following: as of Friday's market close, 104 of S&P 500 stocks in the US provided a dividend yield of 3% or higher, and 9 companies provided a yield of 6% or higher. In Europe, 246 companies in the DJ STOXX 600 provided dividend yield above 3%, 54 were above 6% with the highest providing an annual yield of 15.5%. When reviewing a universe of publicly traded limited partnerships and real estate investment trusts (REITS) in the US, there are 140 with an annual dividend yield greater than 3%, 68 above 6% and the highest provided a yield of 18.9%.

MY TAKE: As treasury yields have dropped into record low territory, stocks with a dividend yield of 3% or higher, provide an interesting investment alternative. In addition, as cash has increased on many corporate balance sheets, some companies which have historically been reserved about providing a dividend, such as Cisco Systems (US: CSCO), are moving in this direction as well. It is important to understand that investments options are never without risk. While providing a dividend payout is generally a sign of a strong company, the investment should be assessed on both the potential future dividend yield and the safety of the principal (the price of the stock). When considering high dividend yield investment ideas, an understanding of both a company's financial health and its capacity to pay dividends over a long period of time are important. A track record of consistent or improving earnings and free cash flow growth should be helpful tools in assessing the quality and potential risks related to these investments.

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