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Don’t Let a High Dividend Yield Fool You

Chasing dividend yields alone, can be downright dangerous

2019 has been an exceptionally strong year for the stock market because yield-hungry investors were chasing stocks with high dividend yields. Looking ahead, I suspect that 2020 will be an even stronger year for the overall stock market.

dividends

Now, considering that the Federal Reserve is holding off on raising key interest rates next year, I expect investors will continue to pour into dividend stocks.

Keep in mind that 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%.

However, not all dividend stocks are created equal. But before I explain why, let’s take a step back and talk about what exactly a dividend is.

A dividend is the distribution from a company’s earnings paid directly to a class of its shareholders. It is up to the company as to when (or even if) it is paid. The dividends tend to be paid out on a quarterly basis, but some companies will pay a semi-annual or annual dividend. Company management will always announce when it will be paid — including your deadline to buy the stock in order to receive this payout — and what the dividend will be per share.

Now, the dividend yield varies depending on the company’s actual dividend and where the stock price is at the time. In some cases, you may be looking at a double-digit dividend yield. But as attractive as a double-digit dividend yield may sound, I recommend you pump the brakes before investing. Chasing dividend yields alone can be downright dangerous.

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.

This is why my Dividend Grader is so important. Just like my Portfolio Grader, it uses my proprietary formula to put each stock through a rigorous test, crunching reams of data against a set of criteria I’ve created.

This, in turn, tells us whether the stock is worth investing in or if we should be staying far, far away. Here are a few examples:

Company Symbol Dividend Yield Total Grade
CBL & Associates Properties, Inc. CBL 50.0% F
Summit Midstream Partners LP SMLP 41.1% F
Teekay Offshore Partners L.P. TOO 31.2% F
Dynagas LNG Partners LP DLNG 30.3% F
Martin Midstream Partners L.P. MMLP 30.2% F
GameStop Corp. Class A GME 25.4% F
Quad/Graphics, Inc. Class A QUAD 24.3% F
Highway Holdings Limited HIHO 21.5% F
Consolidated Communications Holdings, Inc. CNSL 21.2% F
Arlington Asset Investment Corp. Class A AI 21.2% f

As you can see, each company has a huge double-digit dividend yield, but it also receives an “F” rating from Dividend Grader. This is because their dividend trend, dividend reliability, forward dividend growth and earnings are very, very poor.

Now, I don’t want to scare you away from dividends —  far from it. I just want you to be aware of the potential risks. Investing in dividend stocks can also be very lucrative. If you get it right, you can make a fortune. Fundamentally strong dividend stocks pack a one-two punch of share price appreciation and a steady stream of income … with payouts that can be twice or five times what you get from a Treasury bond or from a bank.

In fact, my Growth Investor advisor service features the crème de la crème of dividend growth stocks. A stock only makes it to our Elite Dividend Payers Buy List if it receives a “AA” rating, which means it must have an “A” rating in both Dividend Grader and Portfolio Grader.

I’ve nicknamed these AA-rated stocks “Money Magnets” because I’m not the only one who finds them to be great investments — they’re set to enjoy a flood of “smart money” from the big Wall Street institutions as well. You can learn more about them here.

In fact, I just recommended a brand-new AA-rated stock in my latest Growth Investor Monthly Issue. It has a solid dividend yield, great long-term potential and is still trading below my recommended buy limit. You won’t want to miss out on this exciting opportunity, so make sure to sign up here so I can reveal its name to you.

It’s no simple task to identify the best dividend stocks on the market, which is why Dividend Grader is such a handy tool to keep in your back pocket.

The bottom line: Don’t just jump into any dividend stock with a high yield. But if you stick with Dividend Grader, my proprietary formula will help you find the best of them and stay away from the worst.

Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.


Article printed from InvestorPlace Media, https://investorplace.com/2020/01/dividend-stocks-high-dividend-yield-fool-you/.

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