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High-yield = High-quality?

A mistake that beginning investors often make is going to a stock screener like Finviz and then simply searching for the stocks with the highest dividend yields, which in some cases are 10 or even 20%.

If you buy shares of a certain stock worth $2000, it seems pretty fabulous to get dividends worth $200 (10% yield) or $400 (20% yield) every year. It seems like you’re make our original money back in 5 or 10 years and then you’ll just be getting pure profit. Not to mention any capital (stock price) appreciation.

Except stock yields this high are extremely dangerous and there is a reason why any solid, blue-chip company (ie: Wal-Mart, Mcdonalds, Chevron, Pfizer) would never, ever pay that much. These companies will generally pay 2-5% and the theory is that as profits increase over time, dividend payments will as well. If a company is paying 10 or 20%, they will most often have one of the following problems:

1. They are borrowing money to pay the dividend and it’s not coming from profits.

2. They are issuing more stock to pay the dividend, which dilutes the stock and forces share prices down.

3. They are using savings to pay the dividend and not profits, which isn’t sustainable for more than a couple years.

4. They are not investing any money into the future growth of the company.

Beware!

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