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Michael C. Thomsett is a widely published options author. His "Getting Started in Options" (Wiley, 9th edition) has sold over 300,000 copies. He also is author of "Options Trading for the Conservative Investor" and "The Options Trading Body of Knowledge" (both FT... More
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Getting Started in Stock Investing and Trading
  • Are big-dividend stocks better choices? 1 comment
    Mar 1, 2012 11:23 AM | about stocks: LMI, CRU, LPHI
    On the surface, it seems obvious that chasing big dividends is smart trading. But in practice, a double-digit dividend stock may also be a red flag.

    Because dividend yield is based on the dividend per share and current price per share, if the price plummets, the yield goes up. A good example of this is the case of Legg Mason (NYSE:LMI). As of June 13, 2011 the company's dividend yield is an impressive 12.22%. But this is not a good sign. The company's stock was selling at $35.oo per share in December, but currently is worth only $22.81. This is a 21% decline in market value in only five months. That annualizes out to 50% (divide the decline by five months and then multiply the result by 12 months).

    A big dividend could result from bigger problems in the fundamentals. Another example is that of Crude Carriers (NYSE:CRU). Last August, stock was at $18.77; currently it goes for $11.27, a 40% decline in eight months.

    An even bigger red flag is found in the case of Life Partners Holding (NASDAQ:LPHI), a NASDAQ listed insurance concern. In December stock sold for $18.64. Today it is worth a mere $3.35, a decline of 82% in only five months. A very quick evaluation tells why. On June 10, Ernst & Young resigned as the company's auditor and withdrew its opinion after receiving a second Wells Notice from the SEC (notice of the SEC's intention to file civil action against a company). For the purpose of evaluating dividend yield, the reasons behind these changes are not important; what is important is the underlying cause of the decline.

    So if you chase big dividend yield as the only test of investing or trading a stock, be prepared for possible price decline and the potential for severe problems. Those big yields exist for a good reason. It is smart to know that reason before buying shares.

    To make sure you are chasing profits and not deceptively large yields at the cost of market risk, look for low-risk ideas in a quick and easy format. Check profitable trades to see how.

    Michael C. Thomsett is an instructor with the New York Institute of Finance, where he teaches five courses. He is also an investing and options and technical analysis author. Thomsett's latest FT Press book is Trading with Candlesticks.

    Stocks: LMI, CRU, LPHI
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  • Thomsett
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    Author’s reply » A big dividend often is found in a depressed price, so be careful.
    1 Mar 2012, 12:13 PM Reply Like
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