Dividend stocks are often most alluring when they are at their most dangerous.
Sure, it’s hard resist dividend stocks yielding more than, say, 10%, but it’s critical that you know where that yield comes from. Crazy-high yields on dividend stocks are usually a sign of trouble — even for real-estate investment trusts, utilities and telecommunications companies that are supposed to sport fat yields.
As with bonds, the yield on dividend stocks will rise as the price falls. If a stock’s price falls so much that the dividend is hitting double-digits, the market is probably trying to tell you something about its health.
Recognizing that relationship is critical because troubled companies have a nasty habit of cutting or suspending their dividends in order to conserve cash, and anything that messes with dividends is guaranteed to dividend stocks tumble. JCPenney (JCP), for example, dropped 20% in a single session following a divided cut back in 2012 (and it hasn’t been a worthwhile buy ever since).
There is no shortage of dividend stocks yielding more than 10% — a yield that’s essentially the same as a junk bond. We found more than 85 of them after running a simple screen, and many of them are large, legitimate companies — not unstable, speculative microcaps. But that doesn’t mean you should buy them.
Here are five dividend stocks with dangerously high yields that you would do well to avoid: