Note: This article is courtesy of Iris.xyz

By Shundrawn A. Thomas

“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” — JOHN D. ROCKEFELLER

Rockefeller’s sentiment above remains true for many investors. For decades, dividend income has been a crucial component of a stock investor’s total return, often trumping capital appreciation in volatile markets. In this recent environment of falling yields on bonds with interest rates at or near zero, dividends are especially valued. That is when income-seeking investors start to include dividends in their search for yield to meet their financial goals. Blindly focusing on yield, however, could be dangerous to an investment portfolio’s health.

A seemingly generous dividend yield may actually signify a weak share price tied to negative news not yet revealed in the quarterly dividend. Yields for a current year are often estimated using the previous year’s dividend yield or by taking the latest quarterly yield, multiplying by four and dividing by the current share price. This explains why investors in dividend stocks must be confident the dividend being paid is sustainable.

In other words, make sure the payout is well covered and the company can grow it over time.

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