Many investors are on a never ending quest to locate the best long term dividend stocks. These investors study dividend dates, income stocks, income bonds and even high yield corporate bonds to successfully build an income portfolio.
However, most investors forget about the dangers of stocks that pay high dividends.
Here are a few of the dangers.
Just because a stock pays a high dividend does not mean it’s a good investment. Dividend yields are the present yearly dividend payment divided by the stock price. What this means is yield is only what the investor can expect to earn if he buys at the present price. It’s not a number fixed in stone for the year.
The dividend can remain exactly the same, yet share prices can be dropping which results in the yield increasing. Obviously, falling prices are a major risk factor with high yielding stocks.
The falling stock price counteracts the high dividend yield easily creating an overall losing investment despite the high yields. Not to mention, dropping stock prices and rising yields sometimes results in a company cutting dividend payments which can trigger a downward price spiral in an already weakened stock.
Another danger is the fact that payment of dividends is a decision made by the board of directors of the company. This means dividends may be hiked in a last ditch effort to attract and divert investors from inherent issues within the company.
Finally, dividends can also be cut during difficult economic times. For example, by the end of 2009, 804 companies slashed their dividends in an effort to raise balance sheet cash.
It’s very important to remember, that on occasion, dividends are cut to pay for acquisitions and other cash needs. This means that dividend cutting is not necessarily a sign of company trouble.
Source: http://www.tradingtips.com/beware-of-the-dangers-of-dividends/