Dangers Of Dividend Stocks

Posted by D4L | Sunday, March 04, 2012 | | 0 comments »

The current low-interest-rate environment has caused many investors to search for sources of incremental yield. Two of the more popular approaches involve dividends: stocks with high dividends (or higher yields than available from safe fixed income investments) and stocks with fast-growing dividends. We will examine two of these alternatives to see if they're good choices.

To represent high-dividend stocks, we'll use the SPDR S&P Dividend ETF (SDY). To represent fast-growing-dividend stocks, we'll use the Vanguard Dividend Appreciation ETF (VIG). Although the dividends from these two strategies may provide higher yields than bonds in this current environment, keep in mind what would likely happen if the market heads south again. Not only would the value of the stocks drop, but the companies may choose to trim or even eliminate their dividends. Certainly, that's what we saw in 2008, as SDY's net asset value dropped 23 percent and VIG's NAV fell 26 percent.

Source: CBS News

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