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By Alexandra Scaggs
It's no secret that companies that have posted dividend increases — or introduced payouts — have been snapped up by yield-hungry investors.
Dividend stocks have gotten so popular, in fact, that we're seeing our second warning this week cautioning investors to look before they leap.
“Pursuing yield for the sake of yield can be a dangerous proposition, potentially leading to investment in weakening franchises,” says Richard Skaggs, senior equity strategist with Loomis Sayles, in a note this morning.
Before getting caught up in the great yield rush, he recommends that investors look at the underlying strength of the company along with its stock yield.
He's not saying down with dividends, by any means. Skaggs (note: no relation to this reporter, other than spelling confusion) says that dividend growth could outpace earnings-per-share growth this year.
“Dividends have already begun a strong growth trajectory with a 16.2% increase in 2011, the fastest annual growth rate in 30 years,” he wrote.
And while investors have historically looked for dividend stocks in specific sectors—financials or utilities are two classic examples—Skaggs says that a greater range of companies have been boosting their investor payouts.
Dividend growth in companies with rock-solid balance sheets is the key for Loomis. While income-oriented investors are typically attracted to companies with higher-than-average payouts, Skaggs says, dividend growth can be better for long-term returns.
Technology stocks are seeing dividends grow (thanks Apple), along with health care and consumer staples. “Companies in these sectors were less affected fundamentally by the severe recession of 2008 and continued to show healthy dividend progress,” he said.
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