NEW YORK (TheStreet) -- Given low interest rates -- the 10-year Treasury is yielding only 1.6% -- it is remarkable that there are nearly 500 companies with markets values over $500 million that yield more than 3.2%.
It is a foregone conclusion, in my view, that rates will rise substantially in the coming years. It's just a matter of when. When that happens, bond owners will see the value of their holdings drop; the longer the term, and lower the coupon, the greater the damage. That is simple bond math, and it is the reason many pundits are advising that the duration of bond portfolios be shortened.
But owners of dividend-paying stocks face their own share of risks. There's always market risk; stock prices can fluctuate wildly. There's plenty of evidence to suggest that high-quality dividend-paying stocks face a lower level of price volatility, and that the dividend may help put a price floor in place. It is unlikely that a high-quality name yielding 4% will see its price cut in half, at least for very long, assuming the fundamentals are intact, and that there's not trouble brewing specific to that company or industry. If the story is intact, theoretically, new buyers will emerge, taking advantage of the now 8% yield, pushing the price higher and the yield lower.
One of the greatest risks to those seeking yield through dividend-paying stocks is the possibility that the dividend is either reduced or eliminated. That is typically a signal that all is not well with the company, but there are often warning signs that investors should be aware of. Ultimately, dividend cuts or eliminations are rarely a surprise when announced.Declining earnings and rising dividend payout ratios can indicate that a cut may be coming. A disappointing quarter or two, where the overall story and fundamentals remain intact is typically not cause for panic. But a sustained rise in payout ratio, declining earnings, rising debt level, and decreasing liquidity should not be ignored; especially if the company is in an industry that is struggling or in decline.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV