All things being equal (they never are, but you know), picking the company with the higher dividend yield may seem like the right thing to do. In this article, I’m going to highlight some concerns with such a strategy.
However, if company A grows its dividend by 10% a year every year and company B only raises their divided by 5% each year in a short amount of time, Company A’s payout will surpass that of company B. Growth rates of dividends, and by extension cash flows, are therefore more important (in my opinion) than the dividend yield itself.
Higher-yielding companies are therefore at higher risk for a dividend cut.
Investors ought to also monitor closely the payout ratio (dividend divided by cash flow or earnings) to see how sustainable a yield is, particularly if one sees such a yield climbing rapidly.