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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 A Safe Bet? Not Always 0 comments
    Feb 11, 2014 12:41 PM

    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 big dividend could result from bigger problems in the fundamentals.

    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 overcome this problem, don't look only at the current dividend yield. Look at the 10-year record and also review what has been going on in other key fundamental indicators: revenue and earnings, P/E ratio, and debt ratio. These tell the bigger story. Also check current news about a company. If they have announced plans to file bankruptcy, the stock price may have fallen in recent days, and one result is a very large dividend. But it is not good news for stockholders, so b3e careful. Don't rely just on the yield.

    To gain more perspective on insights to investing observations and specific analysis, I hope you will join me at ThomsettStocks.com where I publish many additional articles. I also maintain a virtual portfolio of stock at ThomsettStocks.com. 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 to learn more.

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