For investors with a long-term horizon, it’s important to not only look at a stock’s current dividend yield but also to look at its payout ratio. A payout ratio is simply the percentage of net income a company pays out in dividends. A young, fast growing company will likely have a very low payout ratio, assuming it even pays a dividend at all. As the company grows and matures, however, it will have less growth opportunities and will plow back less cash into the company and more into your wallet.
For a company to consistently raise its dividend at such a high rate over a long period of time, it needs to generate solid free cash flow, have a strong competitive advantage, and more than likely raise its payout ratio. Stocks with excellent potential have strong cash flow, a history of double-digit dividend increases, a relatively low payout ratio, and a competitive advantage in their respective markets.
Source: Zacks
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Posted by D4L | Saturday, May 07, 2011 | ArticleLinks | 0 comments »________________________________________________________________
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