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Lessons for Investors

Consider the lessons of this chapter. Stocks that pay high dividends have historically delivered higher returns than the rest of the market, and stocks that increase dividends see their stock prices go up. On the other hand, stocks that pay high dividends grow earnings far more slowly (thus delivering less in price appreciation) and are often unable to sustain dividends in the long term. The last section demonstrates the attrition in a high dividend portfolio once you begin to ask questions about the sustainability of dividends and expected growth rates. You began with a sample of the 100 companies that had the highest dividend yields, but you eliminated 79 of these firms either because they had negative earnings or because their dividend payout ratios exceeded 80%. Of the remaining 21 firms, 8 firms were eliminated because they had negative free cash flows to equity or because their dividends exceeded their free cash flows to equity. Of the 13 firms left, only 3 had expected growth rates greater than 3%.

Looking at the process, you would have been better served if you had not begun the process by looking at the highest dividend yield paying stocks and instead looked for stocks that met multiple criteria—high dividends, sustainable earnings and reasonable growth rates in earnings per share—across all traded stocks. For instance, you could screen all U.S. stocks for those stocks that have the following characteristics:


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