It would be easy to go through a database of stocks, filter out the five highest-yielding ones, and whip up an article touting their income-generating prowess.
However, I’d be doing a great disservice to investors if I did.
It’s not always the case, but some companies dole out excessive yields because their stock prices are low or they have failing business models, or both. It’s a great way to lure in dividend-myopic investors who don’t read the fine print about earnings and cash flow.
It’s far better to seek out companies that pay a 2% to 3% dividend that intend to grow that dividend—and earnings—over time. Besides, if it’s outpacing inflation, there’s no immediate reason to get greedy.
Unfortunately, greed is as dirty a five-letter word as growth, when it comes to dividends. For example, investors in phone and Internet carrier CenturyLink (CTL) were caught off-guard in February 2013 when the company said it would cut its dividend by 26%.
Stocks with the best of both worlds
Shares of CTL fell 23% in response, the most they had in three decades, and $6 billion in market value evaporated. Although CenturyLink is still delivering a 6.8% dividend, the stock remained down 21% for 2013, and left plenty of doubt in investors’ minds.
The cut, made to promote a more flexible stock buyback program, raised the eyebrows of many analysts. It should raise yours as well; knowing that CEOs giveth and taketh away dividends at their own discretions.
If you need to generate income, it’s entirely possible to get the best of both worlds: companies that pay steady dividends and deliver growth to boot. Think this is just another too-good-to-be-true story? Think again.
Here are three stocks that do just that.