Companies pay dividends from free cash flow, the money left over after expenses and fixed asset purchases. If a company offering a high yield pays out more than its free cash flow (often by taking on debt), it depletes its value. This means the stock will probably lose value in the long run; a 7% yield doesn't look as good if the stock loses 10% of its value. Some funds offer incredible yields, sometimes 10% or more. Have you wondered how they do this? It is because they are leveraged -- they buy securities and then borrow against them to purchase more. This is incredibly risky if the market goes south. What's an investor to do? I recommend focusing on dividend growth and business strength. Here's how it works over time.
Texas Instruments (TXN) is an incredible example of dividend growth in action. The company leads the analog semiconductor industry, selling mainly to the industrial and automotive sectors. Home improvement is a resilient industry. People spend to fix up their homes for sale and to make their new place their own when housing is hot. When housing is tight, folks buy goods to improve their current space. Either way, Lowe's (LOW) can thrive. This is one reason the company has paid a quarterly dividend since 1961 and increased the payout each of the last 25 years. If you still aren't ready to sacrifice yield, Vici Properties (VICI) offers both a juicy 5% yield and an increase in each year of its short five-year history.
Source: Motley Fool
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