The ins and outs of … high-yield danger signs

Article Excerpt

High dividend yields are very attractive to investors. But they should always be looked at with caution. High-yielding stocks can provide a great boost to a portfolio’s returns, and quality dividends are much more reliable than capital gains. Today, the appeal of high yields is even greater given the low-interest-rate environment. That means investors are earning negligible returns on their fixed-income investments. That has also led some investors to buy highyield stocks indiscriminately. In particular, they do so without looking to see if that yield is simply high because investors worry the company cannot maintain its current dividend. That uncertainty can quickly drive down a stock’s price. Remember, the formula for dividend yield is dividend divided by stock price. In other words, when the stock price (the bottom number in the fraction) goes down, its dividend yield goes up. If the company does indeed cut its dividend, that could quickly take its stock price even lower. It’s why we look beyond dividend yields when making investment…