Where Are the 'Safe' Dividend Yields?

Investors seeking dividend income have typically relied upon a group of industries that dependably issue payouts. But these industries are under siege and are taking the broader market down. Banks, mortgage REITs and specialty finance firms have been the worst culprits when it comes to displaying a high-indicated yield that turns out to be either unsustainable, or much too meager to offset the subsequent capital loss from sinking shares.

So what's an income investor to do to help winnow the "safe" yield plays from the merely seductive ones? Once again, insiders can be extremely helpful in this endeavor.

I run a screen every month in TheStreet.com Insider Insights newsletter that notes high-yielding stocks that are also being supported by insider buying. While an indicated yield can become artificially high as a stock trades lower in anticipation of a payout-destroying event, such a reduction seems less likely -- or, at least, less devastating -- if insiders are buying in.

If a board of directors is deciding whether to maintain or cut a dividend, they would be less inclined to cut the dividend if they are also buying shares. And for other income-generating securities that pay out a percentage of profits, insiders buying into their high yields would seem to indicate that any anticipated reduction of distributable cash flow won't be as bad as the market expects.

Don't Forget the Common Sense

The maxim of "if something appears to be too good to be true, it probably is" still applies. So when I see securities on my insider screen with indicated yields north of 20%, I'm more suspicious than salivating.