Here's a quick primer on avoiding dividend yield traps.
Q: There's a stock I have my eye on that pays a 10% dividend yield. This sounds too good to be true. Is it?
Generally speaking, double-digit dividend yields are indeed too good to be true. They are often either being paid by unstable companies, or simply represent too much of a company's earnings to be sustainable.
Of course, there are some exceptions. There are a few questions you should ask yourself to help you avoid dividend yield traps, which is a common term for stocks with too-good-to-be-true dividends. I'll use two stocks as examples to illustrate them.
For starters, does the stock pay an unusually high dividend for its industry? Most telecom stocks have yields around 5%, so CenturyLink's11% yield should certainly set off alarm bells. However, senior housing REITs tend to pay 6% to 7% right now, so Senior Housing Property Trust's8% yield isn't necessarily out of the ordinary.
Next, does the payout represent an excessive percentage of a company's net income? Senior Housing Property Trust pays out about 86% of its funds from operations -- a completely normal payout for a REIT. Meanwhile, CenturyLink pays out more than 135% of its trailing-12-month earnings, a potential red flag.
Finally, are there problems with the business from a long-term perspective? For example, some forms of brick-and-mortar retail are having trouble adapting to the e-commerce surge, so 10%-yielding DDR Corp, an owner of shopping centers, could have a tough time maintaining its payout. On the other hand, senior housing is a growing market, so Senior Housing Properties Trust doesn't have a similar long-term trend working against it.
To be clear, these are just a few examples of things to look for and aren't reasons to buy (or not buy) the stocks mentioned here. However, they can give you an idea if a stock's dividend could be in trouble.
Matthew Frankel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
FAQs
Generally speaking, double-digit dividend yields are indeed too good to be true. They are often either being paid by unstable companies, or simply represent too much of a company's earnings to be sustainable. Of course, there are some exceptions.
What are the best dividend funds for the Motley Fool? ›
Eight top dividend index funds to buy
| Fund | Dividend Yield | Expense Ratio |
|---|
| Vanguard High Dividend Yield ETF (NYSEMKT:VYM) | 2.86% | 0.06% |
| Vanguard Dividend Appreciation ETF (NYSEMKT:VIG) | 1.80% | 0.06% |
| iShares Core Dividend Growth ETF (NYSEMKT:DGRO) | 2.33% | 0.08% |
| Vanguard Real Estate ETF (NYSEMKT:VNQ) | 4.06% | 0.12% |
5 more rowsApr 9, 2024
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What is considered a good dividend yield? ›
What Is a Good Dividend Yield? Yields from 2% to 6% are generally considered to be a good dividend yield, but there are plenty of factors to consider when deciding if a stock's yield makes it a good investment. Your own investment goals should also play a big role in deciding what a good dividend yield is for you.
What is the safest dividend stock to buy now? ›
10 Best Dividend Stocks to Buy
- Verizon Communications VZ.
- Johnson & Johnson JNJ.
- Altria Group MO.
- Comcast CMCSA.
- Medtronic MDT.
- Duke Energy DUK.
- PNC Financial Services PNC.
- Kinder Morgan KMI.
Sometimes high yield can be misleading since it may indicate a falling stock price instead of an increase in dividend payment. This indicates that the company may have financial difficulties, or the financial market may perceive the stock as less valuable. The yield is only relevant for those stocks that pay dividends.
Is Coca-Cola a dividend stock? ›
The Coca-Cola Company's ( KO ) dividend yield is 3.09%, which means that for every $100 invested in the company's stock, investors would receive $3.09 in dividends per year. The Coca-Cola Company's payout ratio is 73.72% which means that 73.72% of the company's earnings are paid out as dividends.
What is the best dividend stock of all time? ›
Some of the best dividend stocks include Johnson & Johnson (NYSE:JNJ), The Procter & Gamble Company (NYSE:PG), and AbbVie Inc (NYSE:ABBV) with impressive track records of dividend growth and strong balance sheets. In this article, we will further take a look at some of the best dividend stocks of all time.
Who is the best dividend investor of all time? ›
Warren Buffett is widely considered the greatest investor of all time, and much of his investment strategy relies on collecting dividend payments.
What stock will boom in 2024? ›
10 Best Growth Stocks to Buy for 2024
| Stock | Implied upside from April 25 close* |
|---|
| Tesla Inc. (TSLA) | 23.4% |
| Mastercard Inc. (MA) | 19% |
| Salesforce Inc. (CRM) | 20.8% |
| Advanced Micro Devices Inc. (AMD) | 30.1% |
6 more rowsApr 26, 2024
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In a market that generates a 2% annual yield, you would need to invest $600,000 up front in order to reliably generate $12,000 per year (or $1,000 per month) in dividend payments.
Can you live off dividends? ›
You can retire on dividends. To do so, you generally need to start investing in dividend-paying assets early and reinvest the dividends until you retire.
How much can you make in dividends with $100K? ›
How Much Can You Make in Dividends with $100K?
| Portfolio Dividend Yield | Dividend Payments With $100K |
|---|
| 1% | $1,000 |
| 2% | $2,000 |
| 3% | $3,000 |
| 4% | $4,000 |
6 more rowsA payout ratio over 100 may indicate that the dividend is in jeopardy, because no company can continue pay out more than it earns indefinitely. A very high payout ratio can be a sign to investigate further, but it's not necessarily a signal to run screaming.
What does a 10 percent dividend yield mean? ›
Suppose a company with a stock price of Rs 100 declares a dividend of Rs 10 per share. In that case, the dividend yield of the stock will be 10/100*100 = 10%. High dividend yield stocks are good investment options during volatile times, as these companies offer good payoff options.
What does a 10% stock dividend mean? ›
Stock dividends are a percentage increase in the number of shares owned. If an investor owns 100 shares and the company issues a 10% stock dividend, that investor will have 110 shares after the dividend. Dividends are not guaranteed until they are declared, however.
What does a 10 percent stock dividend mean? ›
Definition of Stock Dividend
For example, if a company declares a 10% stock dividend, a shareholder who previously owned 100 shares would receive an additional 10 shares, increasing their total ownership to 110 shares.
