It's scary out there for dividend investors.
Even with the recent rally, dividend yields are sky-high. According to Capital IQ, there are 1,316 stocks on our major exchanges that have yields of 5% or more. But a lot of these are dividend traps, enticing us with the promise of fat quarterly payouts only to cut them down the road.
As a stark reminder, we can look to General Electric . Once hailed as the safest of the safe, GE has in short succession gotten government help, cut its dividend to save cash and (hopefully) retain its AAA debt rating, and then lost that AAA status anyway.
And of course, relatively conservative banks like BB&T (NYSE: BBT) and US Bancorp (NYSE: USB) are another reminder of safe dividends gone scary.
The "5% of nothing" club
Traditionally, a 5% dividend yield has been eye-popping enough to elicit fears of a dividend cut. Now, it feels commonplace. When you see a blue chip like Kraft creeping up on a 5% yield, anything short of double digits starts to feel safe. And we start getting a little greedy.
But that greed can turn right back into fear if the great double-whammy curse of high-yielding stocks kicks in. After all, we buy dividend stocks because they provide a large, steady stream of income and have the promise of stock price appreciation. But then:
Whammy!)In order to preserve precious capital, said company cuts or altogether eliminates its dividend, destroying dreams in the process. (Double-whammy!)As a result, I view any dividend yield as a "too good to be true" situation until I've fully vetted the company. It's a good default stance on any stock you're considering buying. Let's take a quick look at some companies with plus-5% dividends to illustrate:
Company
Dividend Yield
Payout Ratio
BP (NYSE: BP)
7.4%
63%
Dupont (NYSE: DD)
6.8%
115%
Limited Brands (NYSE: LTD)
5.2%
158%
Barnes & Noble
5.1% Continued... |