How Important Is Stability When Selecting Dividend Stocks?

By: ispeculatornew
Date posted: 06.07.2012 (5:00 am) | Write a Comment  (3 Comments)

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When selecting dividend stocks, most of us agree on a few basics. We are looking for stocks that pay a decent to good dividend, that is both able and willing to increase it over time and that is expected to have a long term solid business for years to come. I don’t think many of you would disagree with such comments. That being said, there are other parts where it would be both logical and expected for some to disagree.

#1-How high should be the dividend yield?

I have discussed how retiring with a long term sustainable dividend portfolio can work out well, even compared with other products such as annuities. There are many however who need more than a 3% or so dividend to live perhaps because they did not save up as much as they would have wished, Thus, I did a post using a high yield divdend portfolio, found good candidates that came up to a 5% divdiend yield portfolio. Not bad right?

#2-How Stable Should The Company Be In Paying Its Dividends

Many are fans of buying dividend aristocrats which are known to increase their payout every year for decades. I’ve said in the past that I was not as convinced. I prefer holding stocks that try to maximize their payouts every year. The advantage of course is that the dividend yield tends to be higher as is the growth. The downside though is that compared with a more traditional dividend portfolio (such as the USDP), this one is more likely to see dividends coming down at some point which would of course be an unpleasant surprise.

Part of the reason is the culture. For many European companies, it’s all about paying a portion of earnings, no matter if it is higher or lower than the previous year (everyone hopes it will be higher of course). I have written about the desire for a company such as Microsoft to pay out a fixed portion of its earnings which would certainly raise the overall dividend but would also bring more volatility in the payout and years where the dividend would actually decline compared to the previous year.


Personally, I would not mind this. I would probably prefer it in fact. The goal would simply be to pick more winners than losers and thus still have a dividend portfolio that can increase its overall payout every year. How about you? Would you mind holding names that have a more volatile payout?

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  1. Pingback by Weekly Dividend Links — June 8, 2012 @ 4:01 am

    […] 5. How Important Is Stability When Selecting Dividend Stocks? @ IS. […]

  2. Comment by John Hunter — June 8, 2012 @ 6:38 pm

    I think it all depends. I would rather have management have flexibility. Paying out too much (say some set target of cash flow) can be a problem if things change over time. What had been a decent target is no longer…

    I do agree that I think many companies are too conservative in the payouts likely so they can avoid having to cut the dividend later.

    One strategy they could use is a slowly raising base pay with a annual special dividend that varies quite a bit depending on earnings (and also any good investment opportunities – if the company has other good options for the money that may take precedence).

  3. Comment by IS — June 9, 2012 @ 5:18 am

    @John Hunter – Very much agree with you, I think that could work very well, I’m not sure why so few US companies go down this road

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