This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

When Dividend Stocks Appear Too Good to Be True

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.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
RSH $0.31 12.76%
BBY $34.70 0.00%
GCI $35.79 0.00%
AAPL $130.28 0.00%
FB $79.19 0.00%

Markets

DOW 18,010.68 -115.44 -0.64%
S&P 500 2,107.39 -13.40 -0.63%
NASDAQ 5,070.0260 -27.95 -0.55%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs