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Beware the Danger Of Chasing Dividend Yields

Higher yields may be a warning of trouble ahead

   

For the first time in over a half century, the stock market now yields more than the bank. Thanks to the Fed’s monetary stimulus, interest rates and bond yields have fallen to paltry levels, making dividend yields all the more attractive.

But while I’m a fan of juicy dividend yields myself, a word to the wise: You should never pick stocks based on just their dividend.

If you do, you could find yourself like shareholders of CenturyLink (NYSE:CTL). This internet provider boasts one of the highest yields in the Telecom Services industry, but that didn’t help matters when CenturyLink missed fourth-quarter earnings estimates last month. Shares plunged over 20% after the announcement, leaving yield seekers holding the bag.

While high dividend yields can be attractive, that shouldn’t be the only thing you’re looking for when picking stocks.  With some companies, a high dividend yield isn’t always a good thing: Sometimes a high yield is actually caused by a drop in stock price.  (In the case of CTL, after the plunge, the dividend yield rose from 6.9% to over 9%).

Moving beyond the yield and current dividend payment, you want to look at the company as a whole and its history of dividend payments. Consistent and steadily increasing payments are a prime sign of a strong company that makes dividends work for you.

Take tobacco titan Altria (NYSE:MO). In the last 44 years, the company has increased its quarterly dividend 46%! With such a steady dividend history, its small wonder that MO outperformed the S&P 500 each year from 2000 to 2011.

And above all else, before buying any stock, you need to take a hard look at its fundamentals. You can do this by running your stocks through my Portfolio Grader tool. This tool screens stocks based on their profit potential, providing a “Fundamental Grade” that measures a company’s health and a “Quantitative Grade” that indicates whether institutional investors are buying this stock.

To get you started, I’ve run the top 15 dividend stocks in the S&P 500 through Portfolio Grader:

Ticker Company Dividend Yield Quantitative Grade Fundamental Grade My Take
CTL CenturyLink
8.3% D C Hold
EQR Equity Residential 5.5% D C Sell
ETR Entergy 5.3% D C Sell
EXC Exelon 6.8% F D Strong Sell
FE FirstEnergy 5.6% D D Sell
GRMN Garmin 5.1% F C Strong Sell
LMT Lockheed Martin 5.2% D C Hold
LO Lorillard 5.8% D C Sell
MO Altria
5.3% B C Buy
PBI Pitney Bowes 11.5% F B Sell
POM Pepco 5.3% B C Hold
RAI Reynolds American 5.4% C C Hold
TE TECO Energy 5.1% D C Sell
WIN Windstream 11.5% F C Strong Sell

Note that with the exception of MO, each of the other stocks is a hold, a sell or even a strong sell! So it just goes to show that dividends alone won’t ensure profits in this market.


Article printed from InvestorPlace Media, http://investorplace.com/2013/03/the-danger-of-chasing-dividends-etr-exc-fe-grmn-lo-mo-pbi/.

©2014 InvestorPlace Media, LLC

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