think of dividend-paying
companies as boring, low-return investment opportunities. Compared to
companies, whose volatility can be pretty exciting, dividend-paying stocks are
usually more mature and predictable. Though this may be dull for some, the
combination of a consistent dividend with an increasing stock price can offer an
earnings potential powerful enough to get excited about.
High Dividend Yield?
Understanding how to gauge dividend-paying companies can give us some insight into how dividends can pump up your return. A common perception is that a high dividend yield, indicating the dividend pays a fairly high percentage return on the stock price, is the most important measure; however, a yield that is considerably higher than that of other stocks in an industry may indicate not a good dividend but rather a depressed price (dividend yield = annual dividends per share/price per share). The suffering price, in turn, may signal a dividend cut or, worse, the elimination of the dividend.
The important indication of dividend power is not so much a high dividend yield but high company quality, which you can discover in its history of dividends increasing over time. If you are a long term investor, looking for such companies can be very rewarding.