The following video is part of our "Motley Fool Conversations" series, in which analyst John Reeves and advisor David Meier discuss topics around the investing world.
High dividend yields have a powerful allure. However, John and David think they know the real secret to successful dividend investing. The key is to look for companies with modest yields that will grow their dividends for years and years. It's total returns that really matter. Look at Coach. The fashion designer recently started paying a dividend, currently yielding 2.2%. But with all the cash the company generates, that dividend is going to grow for years.
Investors should look for companies just starting to pay a dividend. But they should also look for entrenched companies like Teva Pharmaceutical and Target that have paid dividends for years and will continue to do so. High-yield stocks like Sandridge Mississippian Trust I require special knowledge. And France Telecom may come up on high-yield screens still, but it recently cut its dividend because of cash flow concerns. It's better to look for moderate yields from a company with the power to grow its dividends.
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David Meier and John Reeves have no positions in the stocks mentioned above. The Motley Fool owns shares of Coach and France Telecom. Motley Fool newsletter services recommend Coach and France Telecom. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.