The resulting portfolio of 30 companies is presented

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Unformatted text preview: highest dividend yields. While the average dividend yield on the portfolio is lower than the original portfolio, the dividends are much more sustainable and the firms do have some growth potential. Conclusion Stocks that pay high dividends seem to offer an unbeatable combination of continuing income (dividends) and potential price appreciation. Their allure increases in bear markets as equities decline in value. The empirical evidence also seems to provide some support for the proposition that stocks with higher dividend yields generate higher returns for investors over the long term. What are the potential dangers of investing in stocks with high dividends? The first is that dividends, unlike coupons on bonds, are not promised cashflows. A dividend that is too high, relative to the earnings and cashflows generated by a firm, is unsustainable and will have to be cut sooner rather than later. In addition, the tax laws treat dividends much less favorably than capital gains, and over long periods, the tax bite out of returns can be substantial. Finally, high dividend payouts ofte...
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