Chris B

Don't Chase High Yielding Stocks Blindly

If you need a 3-4% yield to pay for your retirement, buy bank CDs. As many retirees who invested in "the most solid banks in America" discovered, a stock investment is ownership in a business model, not an entitlement to a dividend, and there are plenty of lemons on the proverbial stock market car lot. If there is reason to question the long-term viability of a business model (e.g. there was plenty of analyst criticism of GM and Ford during the 90's), don't expect to draw a dividend for years and then sell the company for more than you paid.

Especially----> Don't buy a company that is destroying its own value just to pay a dividend. I see plenty of companies out there that are borrowing at high interest rates just to pay dividends and to prop up their stock prices. Some of these dividend payers even have negative earnings, which makes the dividend pure debt! Then you see the executives who made those decisions cashing in their stock options while they can. They will end up fine, at the expense of dividend chasers.

If the goal is to preserve the long-term viabiltiy of a company, sometimes the best decision is to temporarily cut the dividend in times of crisis rather than adding more onerous debt at double-digit interest rates. It constrains the business' future EPS far less than other options: layoffs, asset fire sales, adding high-cost debt, shareholder dilution, cutting marketing budgets, or cutting R&D.