Cash Flow Kings With Rising Dividends
Investors continue to seek out dividend income from common stocks even as the uncertainty about future dividend tax rates weighs on people’s minds. The 15% maximum rate for qualified dividends is set to expire at the end of this year unless Congress and the president act. However, the environment of low interest rates coupled with the relative stability of high-yield stocks during market downturns keep dividend-paying stocks on investor’s shopping lists.
The First Cut seeks out domestic, exchange-listed stocks that have consistently raised their annual dividend payment over the last seven years while maintaining positive free cash flow over each of the last seven years. Financial stocks were excluded because their financial statements are not comparable with firms in other industries.
Cash flow is fundamentally different from earnings. Earnings are determined using principles of accrual accounting, while cash flow measures the direct consumption and generation of cash. The First Cut screens for positive free cash flow, which is calculated by examining cash flow from operations (a measure of a firm’s ability to generate cash from day-to-day operations) and then subtracting capital expenditures and dividend payments. Free cash flow is considered to be excess cash flow that a company can use as it deems most beneficial. Strong free cash flow provides financial flexibility to increase dividends, develop new products or services, enter new markets, pay off debt, or buy shares back.
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