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Conclusion

Stocks that pay high dividends seem to offer an unbeatable combination of continuing income (dividends) and potential price appreciation. Their allure increases in bear markets as equities decline in value. The empirical evidence also seems to provide some support for the proposition that stocks with higher dividend yields generate higher returns for investors over the long term.

What are the potential dangers of investing in stocks with high dividends? The first is that dividends, unlike coupons on bonds, are not promised cash flows. A dividend that is too high, relative to the earnings and cash flows generated by a firm, is unsustainable and will have to be cut sooner rather than later. Finally, high dividend payouts often translate into low expected growth rates in earnings.


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