High Yield Dividend Stocks: Exercise Caution!

You’ve come across a list of high yield dividend stocks in your research where the yields are much higher than the rest of the pack.

You get excited and ask yourself... “Is this too good to be true? Should I buy?”

BE CAREFUL!

Stocks with high dividend yields, yields that are abnormally high that is, are usually a sign that the market is avoiding them for some reason. The company could have major issues and/or the dividend might be in jeopardy of being cut.

If earnings have been steadily declining for example, the company may have to cut the dividend to stay alive. A deal breaker for us dividend investors!

Here’s an example of another situation...

Say ABC Industries, an established leader as a service provider to utility companies worldwide, appears to be a good buy.

You have done a stock screen to find a list of companies that meet your financial selection criteria and ABC has made the cut. Click here to see our selection criteria for dividend paying stocks. They have a current yield of 6% while the rest of the companies on the list are yielding around 3% to 4%.

You think to yourself...

“They have made the cut so their balance sheet is clean and they have a long history of paying out dividends? Why is their yield so high? Is this a once in a lifetime buying opportunity?”

It could be but do not buy until you know why the market is undervaluing the company.

You read through their recent quarterly reports and confirm that their balance sheet is indeed in good shape and you also like their long term growth strategy... so far so good?

You then do an internet search to find out if ABC has made the news in any way recently. Numerous links appear to articles that are speaking of the recent investigation that is underway because of suspected management fraud... bingo!

In this case you should avoid the stock like the plague. Management integrity is essential and you should not compromise on this.

However, if you found the reason for the selloff in ABC’s stock to be because of something temporary such as a decline in earnings or a lawsuit, and the company otherwise met your selection criteria then it could be a great buying opportunity!

The moral of the story is that high dividend yield stocks usually signal an underlying problem. If you come across them exercise caution!

If they are on your dividend achievers index, find out why they are being undervalued. The market isn’t perfect and sometimes you will get lucky and find great buying opportunities. Just make sure the company meets your your selection criteria.

So that wraps up our lesson on high yield dividend stocks.... excellent job!

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