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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 Press); and "Options for... More
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Michael C. Thomsett, author
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Thomsett Options
My book:
Getting Started in Stock Investing and Trading
  • Big Dividend Stocks And What The Yield Means 0 comments
    Oct 5, 2013 11:23 AM

    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. So a stock paying $2.00 per share and priced at $40 is yielding 5%. ($2 / $40) But if the stock price declines to $32, the yield is 6.25% ($2 / $32)

    A big dividend could result from bigger problems in the fundamentals. If a company is likely to go out of business, the price may plummet and the result could be a very large dividend yield. So just looking for big-dividend stocks is not enough to overcome market risk. You also have to study the price history and reasons behind big price declines.

    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 gain more perspective on insights to trading observations and specific strategies, I hope you will join me at ThomsettOptions.com where I publish many additional articles. I also enter a regular series of daily trades and updates. For new trades, I usually include a stock chart marked up with reversal and confirmation, and provide detailed explanations of my rationale. Link to the site at ThomsettOptions.com to learn more. You can take part in discussions among members on the site at the Members Forum.

    I also offer a twice-monthly newsletter subscription if you are interested in a periodic update of news and information and a summary of performance in the virtual portfolio that I manage. Join at Newsletter - I look forward to having you as a subscriber.

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