Dividends4Life: Valuation Matters A Lot With Dividend Stocks

When I speak of valuation, I am referring to the mathematical calculation of the returns, which include both capital appreciation and dividend income, which you could prudently expect to earn from the company's cash flows (earnings). Those returns should be large enough to compensate you more than you could earn from a theoretically riskless investment like a Treasury bond. If you are not being compensated for the extra risk you're taking by investing in stocks, then we believe you are paying more than you should be.

Another very interesting investing principle that can be gleaned from this analysis is how VF Corporation, with the lowest historical earnings growth rate, but best (lowest) starting valuation produced the most dividend income and the highest total return. But most importantly, notice how Procter & Gamble with the worst, or highest starting valuation produced the lowest level of total dividends and the lowest total rate of return. Even though Procter & Gamble's earnings growth rate was slightly higher than VF Corporation, due to excessive overvaluation their total dividend income was less than half that of VF Corporation's and their total return only a fourth of what VF Corporation rewarded their shareholders with.

Source: Seeking Alpha

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- 10 Financial Services Dividend Stocks To Boost Your Yield
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