How to Analyze Dividend Stocks

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For many investors, dividends are an integral part of investing. Some investors will only buy companies with dividends, and some will only buy companies with high dividend yields compared to the rest of the market.

Other investors avoid dividends entirely. Instead of looking for dividend stocks, these investors might concentrate on growth companies, which can reinvest their capital at high rates of return and, therefore, would be making a bad decision returning this cash to investors.

Over the past few decades, the company has prioritized business reinvestment. As the company has grown, it has increased its dividend to shareholders with cash that is left over. The conservative approach has yielded fantastic results, with the stock producing a total return of nearly 28% per annum over the past five years.

Some of the world’s largest mining companies also provide an example of this capital allocation framework in action.

Over the past couple of years, Rio Tinto PLC (NYSE:RIO) has reduced capital spending as it has not been able to find enough projects to justify additional capital expenditures.

With capital spending falling, the company used free cash to reduce debt. It moved into a net cash position a few years ago and now returns enormous chunks of cash to investorsthe stock yields around 9.4%.

This article first appeared on GuruFocus.