Sustainable earnings and high yields

Investors cannot simply target stocks with high-dividend yields assuming that the companies are in a position to keep paying those yields. High-dividend yields must be supported by sustainable earnings growth.

Investors cannot simply target stocks with high-dividend yields assuming that the companies are in a position to keep paying those yields. High-dividend yields must be supported by sustainable earnings growth.

In many cases, very high dividend yields are the result of significant stock price falls. In such cases, the high yield is a reflection of the market's concern about operating issues rather than increases in the amount of dividend being paid.

Among the top 20 ASX-listed companies reporting results for the December half, Rio Tinto increased its dividend payment by 35.9 per cent, News Corporation by 31.2 per cent, Newcrest Mining 20 per cent, National Australia Bank 12.8 per cent and Westpac 8.1 per cent.

Macquarie Equities analysed 2010-11 earnings reports to identify those companies that combined consistent earnings growth with above-average dividends. They include ANZ, Westpac, Metcash, Woolworths, Transurban, GPT Group, Adelaide Brighton and Monadelphous Group.

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