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By Jeremy Glaser | 02-16-2010 05:50 PM

The Three Questions Dividend-Seekers Must Ask

Morningstar dividend strategist Josh Peters outlines how his three-question framework plays out for one of his favorite dividend-payers.

Securities mentioned in this video
SYY Sysco Corp

Jeremy Glaser: I'm Jeremy Glaser for With interest rates so low, a lot of investors are looking for yields in a bunch of different places. One good idea could be Sysco. Here to dive into it a little bit deeper is editor of Morningstar DividendInvestor, Josh Peters.

Josh, thanks for joining me today.

Josh Peters: Happy to be here.

Glaser: A lot of times you've talked about the three questions that you have to ask for any dividend-paying stock. Can we talk a little bit about Sysco and how you would answer your three questions for this one?

Peters: Yeah. My process really tries to take the whole mass of information that an investor has to consider about a particular company, and narrow it down to just three questions that are relatively easy to at least think about. Not always easy to answer, but easy to think about.

First of all, assuming that the dividend yield is a meaningful component of your total return--let's say 2% or more--then a lot of the situation is going to come right down to the dividend.

The first question I want to know is, is this dividend safe? Or is something that's going to go away in the next recession, or the next time the company has a kind of short-term problem?

The second question is will this dividend grow? If I want to own a dividend, I also want it to grow at least as fast as inflation. I don't want to lose the purchasing power of my income. And I want that rising dividend to really help drive the stock price up, too, so I'm earning a good total return, not just the dividend.

And then if I consider both the income yield component that comes out of the "is it safe" question, and the income growth component, now I get some sense of what the total return of this stock is going to be going forward, so the question becomes is this enough? Does the total return picture make sense?

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