the Risk of Chasing High Dividend Yields

Posted by D4L | Saturday, May 19, 2012 | | 0 comments »

What’s the easiest way to find a stock with a 10% dividend yield? Find a stock yielding 5% and watch its price get cut in half. I say this mostly in jest, but this is precisely what happened to investors in RadioShack (RSH), the iconic electronics and gadgets chain still found in most American shopping malls. At time of writing, RadioShack yields 9.8%, and this is after the company already slashed its dividend.

This brings me to the point of this article: an investor should never chase a high dividend yield. Exceptionally high dividend yields generally mean one of two things: 1. The dividend is expected to be the only source of return, and investors should not anticipate much in the way of capital gains and 2. The dividend is at serious risk of getting cut and the market has already priced the stock accordingly.

Source: Guru Focus

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