NEW YORK (TheStreet) -- You can count on dividend stocks to make you money regardless of the stock price during times of uncertainty while your neighbor incessantly checks the latest quote. Every investor wants the highest yield possible, but you have to be smart or risk disappointment.
While tempting to find and buy the highest yielding stocks you can, don't allow yourself to get tricked by Wall Street's version of fool's gold. Many investors are lulled into what's known as a dividend trap. Dividend traps are stocks with a high yield because the smart money is exiting as fast as they can. That's why I like Cisco (CSCO - Get Report) and Fifth Street Finance (FSC). More on those below.
One prime example of one to avoid is Box Ships (TEU). It's a Greek shipping company experiencing a painful margin squeeze resulting from industry over-capacity. Box Ships paid a 30-cent quarterly dividend two years ago, followed by a reduction to 26 cents, then 22 cents and the last payment was 6 cents in 2013.
When a yield becomes too good to be true because of a falling share price, it often is. In fact, several stock performance studies of dividend-paying stocks conclude what professional stock traders have known for a long time, namely, when a stock becomes a high-yielding stock as a result of share price depreciation, a dividend cut is likely, followed by further share declines.Fifth Street Finance is a specialty finance company that lends to and invests in small and mid-sized companies in connection with investments by private equity sponsors. Fifth Street has a market cap of $1.29 billion and trades an average of 1.4 million shares a day.
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