There is an old expression you probably have heard before — if it sounds too good to be true, it probably is.
That applies to many things in our lives, and definitely applies to investing.
But many investors seem to forget this rule when it comes to dividend stocks.
And it’s easy to understand the temptation. Investors can look at a high yield and find it so enticing that they jump in without evaluating the rest of the stock’s fundamentals.
And that’s a mistake.
This kind of “yield trap” can be especially seductive right now given that dividend stocks are so popular in this narrower market. Global growth is still slowing and earnings in Q1 2019 are expected to be the lowest in years.
As a result, investors are chasing yield and dividend stocks.
So, let’s review what investors should really be looking for, and use our Dividend Grader tool as an aid in helping us identify the right kind of dividend stocks.
First, let’s review why dividend stocks are some of the biggest winners in 2019.
Growth Investor editor Louis Navellier recently reminded his readers why dividends are such a great investment.
The dividend yield on the S&P 500 hangs around 2%. Remember, most dividends are tax-advantaged and taxed at a maximum federal rate of 23.8%. So, the S&P 500 actually yields more than the 10-year Treasury bond, which yields 2.5% but is taxed at a maximum federal rate of 40.8%.
If you’re familiar with dividend stocks at all, you know that yield vary depending on the company’s actual dividend and its current stock price.
Some companies can sport a very high double-digit dividend yield. And, although that looks attractive, Louis warns his subscribers to be very careful. Picking stocks based only on the yield can be a real mistake.
Stocks are not like Treasury bonds or a savings account: There’s no guarantee that you will get your money back. There’s also no guarantee that company will continue paying a dividend. If you choose poorly, you could lose your capital as the stock price falls. Or, that nice juicy dividend could be slashed.
In most cases, dividend yields are tantalizingly high for a reason (the stocks are cheap and rightly so) – and are simply not supported by the fundamental earnings power of the business.
Louis Navellier’s Dividend Grader can help you separate the winners from the losers. This free tool uses Louis’s proprietary formula to evaluate each stock.
The tool takes all the stock’s data, and puts it through a rigorous test. The tool considers the dividend trend, the payment reliability, and the forward dividend growth as well as several other factors.
At the end of the process, the tool provides a simple grade, on the familiar A to F scale, the tells you whether this stock is a strong buy or a strong sell.
So, let’s see the tool in action.
Below are 10 F-rated stocks with incredibly high yields. They may tempt investors, but at the end of the day, they don’t meet Louis’s strict criteria for a “A” rating.
If you own any of these, you should reconsider right now.
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Looking at those yield numbers, it’s easy to understand why anyone would be tempted. But this is definitely a case where something that sounds too good to be true definitely is.
But, of course, this tool isn’t just for picking stocks to avoid.
The Dividend Grader helps pick a lot of winners too.
One of Louis’s Elite Dividend Payers, a solid A stock, sports a healthy 8% dividend yield and is still a growing investment.
As a real estate investment trust (REIT), Arbor Realty Trust primarily deals with loans and services for senior housing, multifamily housing, healthcare and other commercial real estate assets.
Here is part of what Louis wrote to his Growth Investor subscribers in his latest update on the stock.
Arbor Realty Trust, Inc. (ABR) remains one of my favorite dividend growth stocks. As a real estate investment trust (REIT), Arbor Realty Trust is required to return at least 90% of its taxable income to shareholders in the form of dividends. Most recently, the REIT paid a quarterly dividend of $0.27 per share on March 20. All shareholders of record on March 1 received the dividend.
Arbor Realty Trust also have superior fundamentals, thanks in part to strong demand of its loan and services offerings. In fact, the REIT recently funded a bridge loan for the reverb Oak Forest residences in Illinois, as well as funded a Fannie Mae DUS loan for a 39-unit property in Philadelphia, Pennsylvania. And that’s just a sampling of the loans ABR has funded in the past month. ABR remains a good Conservative buy below $14.
Here is how the stock appears in the Dividend Grader.
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Many people use this time of year for some serious spring cleaning. It’s as good a time as any to take a hard look at your portfolio for what might need to be thrown out.
Use the Dividend Grader to help you evaluate your dividend stocks and ensure you are getting the most bang for your investing buck.
To a richer life…
Luis Hernandez, Managing Editor
and the research team at InvestorPlace.com