THE DANGERS OF HIGH DIVIDEND STOCKS
One question people who are learning how to buy stocks and pick good companies ask is: rather than concern yourself with doing all the work and finding the best stocks to buy right now at any given time, why can’t you just pick a group of high dividend stocks and be done with it? After all, interest rates are so low that the best you can do with CD’s or Treasury bills is about 1%. That’s not much and if you can buy stocks that pay dividends of 5% or higher, you are way ahead of the game. Right?
Stocks with dividends have been a a favorite of investors for years. It is always great to find a good solid company you like that has a stock price you feel is undervalued along with a nice dividend. That dividend is just icing on the cake and even if your stock stays even, you will make money. It’s like you are being paid just to invest!
Right now, you can find stocks that have dividends over 5% and some that are even over 10%. All a stock like that has to do is to stay even and you would make 10% or more! Some examples are CQP, CMO, CPNO, CODI, CLMT, PTNR, and ALSK which all have dividend yields of around 10% or higher.
So, what is wrong with just buying all the high dividend yielding stocks you can find and using that as your investment strategy?
1) One thing is that in times of trouble, the first step any company take is to decrease or totally do away with the dividend. Although you might be getting that return right now, there is never any guarantee the dividend will stay at that level. Don’t ever believe that any dividend is safe no matter how long the company has paid one.
2) Additionally, when a company has a high divident yield, you can bet that many of the investors are there just for that and not necessarily for the fundamentals of the company. They are likely to sell their shares of the stock if the dividend goes down. So, if anything negative ever happens to the dividend, the likelihood is that the stock price will go down more due to the dividend investors jumping ship.
3) Buying stocks based only on their dividend yield is great if the stock is able to tread water or go up. But what if it goes down? A 10% dividend doesn’t look so good if you offset it with a 20% loss in the stock price. Whatever dividend you are getting, it will be little consolation in the end if your stock goes down enough that you have a loss. Remember, the reason you are investing in stocks is to make money and that is the ONLY reason. There is no dividend yield that is ever high enough to guarantee a gain and so using the dividend as the only factor in picking stocks is a faulty one.
