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Fund Spy

Finding Sustainable and Growing Dividends Among U.S. Equity Funds

When it comes to a fund's long-term payout, quality and growth matter just as much as yield.

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Income-oriented equity investors have heard warnings ad nauseam about the dangers of chasing yield. They know they should broaden their purview, but high yields can be hard to resist, especially in the current low-rate environment. However, they shouldn't ignore such warnings because high yields don't always lead to the highest payouts over the long term. Putting other issues like total return and volatility aside for the moment, which factors have the greatest impact on a fund's future dividend stream?

The fact is that the sustainability and growth of a fund's payout can matter just as much over the long run as current yield. This is something that Morningstar's Josh Peters and others have pushed for years among equity investors. To illustrate this, let's revisit the 2007-09 credit crisis. Many companies cut their dividends during that recession, and the payouts for most funds fell. The big banks eliminated dividends entirely when their balance sheets exploded. Even some of the bluest of the blue chips, like  General Electric (GE) and  Pfizer (PFE), cut their dividends. There were few places to hide.

Kevin McDevitt has a position in the following securities mentioned above: VDIGX. Find out about Morningstar’s editorial policies.