This High-Yielding Stock Has the Best Dividend Policy

This High-Yielding Stock Has the Best Dividend Policy

Many dividend investors overlook a critical component of dividend analysis. In addition to the ability to pay dividends for the next quarter or fiscal year, it's also important to take notice of management's dividend policy, particularly as it relates to long-term sustainability. In the short run, a company can continue to pay for dividends by issuing debt or from its existing cash pile, but eventually the company will need to generate cash from operations or cut the dividend.

A notable example of a poor dividend policy was AIG in the lead-up to the Great Recession. Morgan Housel provides more detail, but in less than a year AIG produced more losses than it made in the prior 18 years. Did AIG cut its dividend to preserve cash from operations? No. It raised its payout three times and only stopped paying dividends because of a U.S. Treasury diktat after a government bailout.

By contrast, U.S.-based cigarette-maker Altria (NYSE: MO) is not like AIG. The company has a transparent dividend policy that adjusts to changing conditions well.

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Source: Fool.com