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Thursday, 12 November 2009

Are High Ratio Dividend Payout Stocks Make A Low Risk Investment?

Do you pick a stock primarily due to its high ratio dividend payout or you pick the stock primarily for its future growth and dividend is just secondary reason.

High ratio dividend payout means that the company is paying most of its earnings out as dividends, and doesn’t leave much for reinvestment in the business. Then how does the company grow? If the company cannot grow, it could well mean stagnant earnings per share. Do you believe the stock price will appreciate if the company's future earning is more likely to be stagnant?

What if the company all of a sudden decides that it needs cash for anything like merger or acquisition or if its earnings drop due to an economic contraction, chances are very high that the dividend payment, which was unsustainable in the first place, would be first on the management’s chopping block? Will the stock price tumble?

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