Dividends4Life: Know the Risk Before Switching to Dividend Stocks

Four years ago, Lehman Brothers collapsed and interest rates plunged. The Federal Reserve slashed its benchmark overnight rate from 5.75% to almost zero in a desperate effort to repair the damage. It has been stranded there ever since. Record low yields, even negative ones, have become a way of life, so much so that Fed Chairman Ben Bernanke apologized to fixed-income investors for the hardship he has caused. Moreover, there is no relief in sight. All of the central banks are committed to keeping a lid on rates indefinitely in order to spur the recovery.

There is another problem. These income investors are jumping into an already overcrowded sector of the market. Dividend paying shares are all the rage. People looking for growth have been battered by the slow recovery and volatile markets. So they too are turning to dividends in order to supplement their return. More than $32 billion has been invested in income equity funds since January. Here in Canada there were a lot of defensive investors left stranded when their income trusts converted to corporations. They are always reaching for stocks offering above average yields. The result is that all of the safer blue-chip stocks are relatively expensive.

Source: Guru Focus

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