The following video is part of our “Motley Fool Conversations” series, in which analyst John Reeves and advisor David Meier discuss topics across the investing world.
Dividend stocks are very popular right now -- maybe too popular, in some cases. John and David are being very selective about the dividend stocks that they’re looking at, as a result. What they don’t want to do is pay for high yield that doesn’t have much to support it going forward. Let’s look at some components of the Dow Jones Industrial Average, which currently yields about 2.9%. Let’s start with Merck. Merck has a 73% payout ratio, and its business has plenty of challenges ahead of it. So its 3.8% yield isn’t exciting, because it looks “expensive,” due to lower growth potential. Contrast that with Wal-Mart. It has a 2.2% yield, a 32% payout ratio, and a business that generates tons of cash. As the dividend grows, the yield on the original purchase has room to expand.
John and David own ExxonMobil, which has a 2.5% yield, and a 21% payout ratio, and think it has solid total return potential. And they are considering adding Chevron,too, which has a 3.1% yield, and a 24% payout ratio. Not all yields are created the same, and a high-yielder may not be the best game in town. In fact, it could look expensive, which would suggest low future returns. So it’s a good idea to be choosy.
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