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Dividend Yield
Dividend Channel Staff

Investigating dividend yield should be the dividend investor's first task when investigating a newly screened stock. The universal practice among finance sites and brokers is to present a dividend yield number using whatever dividend amount the stock has recently paid. This can cause a number of situations dividend investors need to look out for, where the high yield presented is actually a trap rather than an opportunity. This article talks about some of those common situations.

(1) Dividend cut imminent

An unusually high yield is often a warning sign that other investors believe the dividend is at high risk of being cut. Often a company will even project a future dividend cut, which would only be known to investors who investigate the company in more detail by reading earnings reports and listening to conference calls. One situation we saw recently was a real estate investment trust (or "REIT") that came public, and had historic accumulated profits that needed to be distributed in order to meet the REIT qualification tests. The company began paying out portions of this historic amount each month, making its regular monthly dividend artificially high. Once the historic profits had all been paid out, the monthly dividend amount dropped and the stock fell, losing 15% of its value within four weeks.

(2) Return of capital

Return of capital essentially means that the company paid a dividend that it did not technically earn. In many cases, commonly with MLPs and REITs, this is because the company is able to record depreciation on its assets. A REIT that owns a property may actually see it appreciate over the course of time, but because of the tax code it is still able to record a depreciation amount that reduces its taxable earnings. In other cases, return of capital is an indication that the dividend that has been paid is not able to be sustained by earnings over the long run. Closed end funds are known to sometimes return capital as a strategic policy, but if the funds do not earn their dividends over the long run it inevitably leads to a price decline that renders the high initial yield too good to be true.

(3) Terminating trust

There is a class of investments that often screen to the top of dividend yield lists, which are trusts that pay out royalty payments until a fixed termination date in the future. Dividend investors who do not dig deeply enough to realize the trust will terminate, may end up paying too much and then unable to sell their shares to someone else before much of the value has been lost. One situation we recently saw was a depleting trust that had been trading in the $60's, plunge to the $20's after research publicized the fact that the remaining expected distributions added up to nowhere near where shares had been trading.

Surviving the minefield of high dividend yield investing can be made easier by spending time researching stocks and talking about them with other dividend investors. ValueForum.com is the web's best private community forum for unvarnished, trusted, up-to-the-minute thinking about any high dividend yield stock you are considering. It is an exclusive group that shares honest opinions and unfiltered insights on income stocks, debating the risks and merits of these investments and outperforming the averages with their quarterly stock contest picks. So if you have the time to devote to research your investments and spend time on stock message boards, ValueForum may be right for you »

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Stock market game
Rank Symbol Dividend Yield* 
#1 MBT Q 0.933586 10.88% 
#2 DHT Q 0.8 15.15% 
#3 NAVI Q 0.64 6.56% 
#4 RSF M 1.7436 11.26% 
#5 FHN Q 0.6 4.71% 
See More Top Ranked Dividend Stocks »

*updated Monday, November 30, 2:00 AM Yield calculations vary and may not be reliable nor comparable. Not all publicly traded securities are ranked; data may be incorrect or out of date. Rankings are for informational purposes only and do not constitute investment advice. Full disclaimer
Rank Symbol Dividend Yield* 
#1 MBT Q 0.933586 10.88% 
#2 DHT Q 0.8 15.15% 
#3 NAVI Q 0.64 6.56% 
#4 RSF M 1.7436 11.26% 
#5 FHN Q 0.6 4.71% 
See More Top Ranked Dividend Stocks »

*updated Monday, November 30, 2:00 AM Yield calculations vary and may not be reliable nor comparable. Not all publicly traded securities are ranked; data may be incorrect or out of date. Rankings are for informational purposes only and do not constitute investment advice. Full disclaimer

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