Eyeing dividend paying stocks? Don’t rush to pick up the richest yielding names

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Don't fall for the siren call of unreasonably high dividends.

Dividend paying stocks could offer investors some ballast as their portfolios face price shocks from equities and bonds – but they'll need to resist the siren call of unreasonably high yields. Last week, the 10-year Treasury yield surpassed the key 5% level for first time since 2007. Bond yields move inversely to their prices. Investors not only saw losses on the fixed income side of their portfolio, but equities also suffered as the S & P 500 shed 2.4% during the week.

A three-bucket approach Gaffney of Morgan Stanley thinks of dividend investing in three parts. First, there are dividend sustainers – companies that have made steady payments for years, including Merck , Johnson & Johnson and Southern Company . Then there are the dividend growers. "We like to look at those companies that are in the phase of the business cycle where revenues are growing at an above-average rate, but funneled into good margin expansion opportunities," Gaffney said.

 

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