Don’t Get Caught in this Tricky Dividend Trap!

1
(No Transcript)
2

• Welcome to Dividend Stocks Research Your premier
  site for Rankings and Reviews of the best
  dividends stocks around. For more info on
  dividend stocks visit our website
• DividendStocksResearch.com

3

• Hi, My name is Aaron and Im with Dividend Stocks
  Research, and today were reviewing our recently
  published article

4
Dont Get Caught in this Tricky Dividend Trap!
5

• Beware.
•  
• Those high yield dividend stocks you keep seeing
  could be nothing but trouble.

6
Expensive trouble

• Theres a reason why the SP 500 pays an average
  dividend of 1.91. But you keep running into
  stocks that pay dividends of twice this much. Or
  even three and four times this much.
• Today, Im going to tell you what you need to
  know to steer clear of the costly high dividend
  trap.

7
Lets start by looking at how companies actually
behave.
8

• Every company behaves differently, but most fall
  into one of two buckets. They either try to
  create shareholder value by reinvesting profits
  in the company and driving up the companys
  revenues and earnings, or they focus on
  distributing dividends.

9

•  
• No matter what kind of a stock youre looking at,
  you cant escape the fundamental connection
  between risk and reward.
•  

10

• If youre going to think about investing in high
  yield dividend stocks, you need to proceed with
  caution. There is usually a good reason why a
  company pays a high dividend, and this reason
  usually doesnt have much to do with the
  companys desire to be generous to dividend
  investors.
•  

11

• So how can you find a high yield dividend stock
  thats going to give you an edge? How can you
  steer clear of the train wrecks that send so many
  of these stocks off the rails?

12
Know The Warning Signs
13

• Stay out of trouble by knowing the warning signs.
  One of the best warning signs is when a company
  starts shoveling so much of its profits into
  dividend payments that it starts making
  sacrifices in its own operations.

14

•  
• It might not be able to pay enough to attract or
  keep the best people. It may have to cut back on
  research, or hold off paying back a debt. The
  company might not have the money in the bank
  thats needed to upgrade a facility or make an
  acquisition.
•  

15

• Whats the easy way to see if this is happening?
  
•  
• Look at the dividend payout ratio. This shows
  the percentage of profits rolled into the
  dividend payment.
•  

16

• Youll see that the payout ratio is different
  from industry to industry. But generally
  speaking, when a company starts plowing more than
  half of its profits back into dividends,
  investors should take notice.

17

•  
• There might not be enough money on hand to grow
  the business. The higher dividend payment could
  be a short-term tactic by management to attract
  new investors.

18

•  
• The pattern of the payout ratio is also good to
  keep an eye on. A sudden spike could mean
  trouble ahead. If a company that traditionally
  follows a payout ratio of 40 moves into the 70
  range, there could be a problem.
•  

19

• So walk away. Take a safer path. And by
  settling for what seems like less, chances are
  good youll actually come out ahead.

20
When Low Yields Pay You MORE MONEY
21

• High yield dividend stocks can lure you in and
  then spit you out not once, but twice.
•  

22

• How can this happen?
•  
• You get hurt if the dividend is cut. The reason
  you bought the stock has gone away, or has fallen
  back to earth with a much more reasonable yield.
•  

23

• And then theres the price you paid for the
  stock. Even if the high yield is still paid and
  the price of the stock goes down, youve got a
  problem.

24

• Naturally, the price of a stock that pays a more
  reasonable and reliable dividend can go down as
  well. But over time, stocks with a history of
  dividend growth and consistent distributions tend
  to hold up better in market downdrafts. The
  dividend yield can actually help support the
  price.

25
High Yields Arent Always The Best Route To High
Returns
26

•  Theres another way to go and thats dividend
  growth. A great example of this is IBM.
•  
• In the Spring of 2014, International Business
  Machines Corp. (IBM) boosted its quarterly
  dividend by .15. It went up to 1.10 a share.
•  

27

• The actual yield was anything but high... a
  modest 2.3. But the consistent growth, 19 years
  of an annual increase, and 11 consecutive
  double-digit increases, is what rewards
  shareholders.
•  

28

• Since 2000, IBM has increased dividend payments
  by 800. Over the past five years, they have
  doubled.
•  
• IBM is a great reminder that the chase for a high
  yield isnt always the best way to capture high
  returns.
•  

29

• Its usually better to focus on stocks that can
  deliver consistent dividend growth than just to
  focus on a high dividend.
•  
• This means youve got to know the territory.
  Know when the numbers start to send warning
  signals.

30
How High Is Too High?
31

• Exactly when do high yield stocks move into risky
  territory? Whats a reasonable yield?
•  
• When you check out the yield of the Aristocrats,
  the most reliable dividend paying stocks, youre
  looking at yields in the 2-4 range. Notable
  exceptions HCP Inc. (HCP) and ATT (ATT) with
  yields above 5.
•  

32

• Keep in mind that HCP is a REIT, a real estate
  investment trust, which by law can avoid paying
  income tax if 90 of its profits are paid out in
  dividends. It is also the only REIT on the SP
  500 Dividend Aristocrats Index.
•  

33

• So when you run into yields higher than 4,
  youre looking at a double-barreled risk. A 5
  yield can evaporate quickly when the stock price
  goes down. Simple arithmetic turns ugly when you
  subtract capital losses from dividend income, and
  the higher the yield, the more likely this is to
  happen.
•  

34

• What happens when a stock you bought because it
  paid a modest yield starts to pay a high yield?
•  

35

• The easy answer is take the money and run.
•  
• Youre in a good position to sell and take your
  profits. The desire not to leave any money on
  the table and wait for another dividend to be
  paid is understandable, but it can also be an
  easily avoidable risk.

36

• Want More from Dividend Stocks Research?
• Follow us on Social Media

37

• Want more FREE information on dividend stocks?
• DividendStocksResearch.com

Get your FREE report now
38
READ THIS FREE REPORT!

• What You MUST Do to Never Run Out of MONEY in
  Retirement!

CLICK HERE