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.

Is Negative Dividend News Positive for the Stock Price?

Look, if you bought these companies as they fell hoping for a 20+% dividend yield as advertised on yahoo.com, that was probably a poor investment strategy. A better bet might be to milk 3-4% gains out of their daily price movements, but that's still risky. There's no free lunch.

Think of it this way, if the company is paying 8-10% interest to borrow money to get them through this slump, would any responsible manager then send that money out as dividends, while leaving the liability on the books? If you owned the company, would you pay 8-10% interest to borrow money so you could pay yourself a dividend and put it in your savings account to earn 3-4%? If your competitors' future earnings could be bought for 1/4 of the price you would have been willing to pay before, would you prefer a dividend instead? Smart businesses are positioning themselves to take advantage. Maintaining a symbolic single digit dividend is irrelevant at this point. If you want yields, buy bonds.