Here's a quick primer on avoiding dividend yield traps.
Q: There's a stock I have my eye on that pays a 10% dividend yield. This sounds too good to be true. Is it?
Generally speaking, double-digit dividend yields are indeed too good to be true. They are often either being paid by unstable companies, or simply represent too much of a company's earnings to be sustainable.
Of course, there are some exceptions. There are a few questions you should ask yourself to help you avoid dividend yield traps, which is a common term for stocks with too-good-to-be-true dividends. I'll use two stocks as examples to illustrate them.
For starters, does the stock pay an unusually high dividend for its industry? Most telecom stocks have yields around 5%, so CenturyLink's11% yield should certainly set off alarm bells. However, senior housing REITs tend to pay 6% to 7% right now, so Senior Housing Property Trust's8% yield isn't necessarily out of the ordinary.
Next, does the payout represent an excessive percentage of a company's net income? Senior Housing Property Trust pays out about 86% of its funds from operations -- a completely normal payout for a REIT. Meanwhile, CenturyLink pays out more than 135% of its trailing-12-month earnings, a potential red flag.
Finally, are there problems with the business from a long-term perspective? For example, some forms of brick-and-mortar retail are having trouble adapting to the e-commerce surge, so 10%-yielding DDR Corp, an owner of shopping centers, could have a tough time maintaining its payout. On the other hand, senior housing is a growing market, so Senior Housing Properties Trust doesn't have a similar long-term trend working against it.
To be clear, these are just a few examples of things to look for and aren't reasons to buy (or not buy) the stocks mentioned here. However, they can give you an idea if a stock's dividend could be in trouble.
Matthew Frankel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
FAQs
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Is 10 percent yield good? ›
Generally speaking, double-digit dividend yields are indeed too good to be true. They are often either being paid by unstable companies, or simply represent too much of a company's earnings to be sustainable. Of course, there are some exceptions.
What is the best dividend stock of all time? ›
10 Best Dividend Stocks to Buy
- Verizon Communications VZ.
- Johnson & Johnson JNJ.
- Altria Group MO.
- Comcast CMCSA.
- Medtronic MDT.
- Duke Energy DUK.
- PNC Financial Services PNC.
- Kinder Morgan KMI.
- Realty Income Corporation (NYSE:O) Dividend Yield as of February 12: 5.61% ...
- Main Street Capital Corporation (NYSE:MAIN) Dividend Yield as of February 12: 5.83% ...
- Apple Hospitality REIT, Inc. ...
- LTC Properties, Inc. ...
- Gladstone Commercial Corporation (NASDAQ:GOOD) ...
- EPR Properties (NYSE:EPR) ...
- PennantPark Floating Rate Capital Ltd.
20 high-dividend stocks
| Company | Dividend Yield |
|---|
| CVR Energy Inc (CVI) | 9.21% |
| Eagle Bancorp Inc (MD) (EGBN) | 8.87% |
| Evolution Petroleum Corporation (EPM) | 8.82% |
| Civitas Resources Inc (CIVI) | 8.82% |
17 more rows4 days ago
Top 100 Highest Dividend Yield ETFs
| Symbol | Name | Dividend Yield |
|---|
| TSL | GraniteShares 1.25x Long Tesla Daily ETF | 98.48% |
| NVD | GraniteShares 2x Short NVDA Daily ETF | 71.04% |
| CONY | YieldMax COIN Option Income Strategy ETF | 69.53% |
| TSLY | YieldMax TSLA Option Income Strategy ETF | 58.21% |
93 more rowsSuppose a company with a stock price of Rs 100 declares a dividend of Rs 10 per share. In that case, the dividend yield of the stock will be 10/100*100 = 10%. High dividend yield stocks are good investment options during volatile times, as these companies offer good payoff options.
What is the safest dividend stock to buy now? ›
Top 25 High Dividend Stocks
| Ticker | Name | Dividend Safety |
|---|
| ENB | Enbridge | Safe |
| HIW | Highwoods Properties | Borderline Safe |
| EPD | Enterprise Products Partners | Safe |
| VZ | Verizon | Safe |
6 more rowsMay 10, 2024
What Is a Good Dividend Yield? Yields from 2% to 6% are generally considered to be a good dividend yield, but there are plenty of factors to consider when deciding if a stock's yield makes it a good investment. Your own investment goals should also play a big role in deciding what a good dividend yield is for you.
Is Coca-Cola a dividend stock? ›
The Coca-Cola Company's ( KO ) dividend yield is 3.09%, which means that for every $100 invested in the company's stock, investors would receive $3.09 in dividends per year. The Coca-Cola Company's payout ratio is 73.72% which means that 73.72% of the company's earnings are paid out as dividends.
World's companies with the highest dividend yields
| Symbol | Exchange | Div yield % (indicated) |
|---|
| EEWINT D | MYX | 100.00% |
| 88031 D | HKEX | 88.76% |
| LPL D | PSX | 73.15% |
| GGTN D | GPW | 62.86% |
27 more rowsDividends can be classified either as ordinary or qualified. Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at lower capital gain rates.
Does Coca-Cola pay monthly dividends? ›
The Company normally pays dividends four times a year, usually April 1, July 1, October 1 and December 15. Shareowners of record can elect to receive their dividend payments electronically or by check in the currency of their choice.
What are the three dividend stocks to buy and hold forever? ›
The key is to find a company that blends a high yield with a sound business model that can support earnings growth, and in turn, a higher dividend. Here's why Brookfield Renewable (NYSE: BEPC) (NYSE: BEP), Vitesse Energy (NYSE: VTS), and Chevron (NYSE: CVX) stand out as three high-yield stocks to buy now.
Is psec dividend safe? ›
PSEC also has higher exposure to riskier areas such as class B and C real estate and residual interests in collateralized loan obligations (CLO). The bottom line is that PSEC's strengths are offset by its weaknesses, which make an investment in this monthly dividend payer a riskier bet over a full economic cycle.
Is 7% a good yield? ›
Anything around the 5-6% mark could be considered a 'good' rental yield, while anything above 6% could be considered 'very good'. Some parts of the country can deliver significantly higher or lower returns to others.
What yields a 10% return? ›
Diversifying Your Portfolio to Reach a 10% Return
A diverse portfolio could consist of 30% in a mix of value and growth stocks, 30% in index funds, 20% in bonds, 10% in real estate and 10% in alternative investments like P2P lending or commodities.
What is an acceptable percent yield? ›
A percent yield of 80%–90% is usually considered good to excellent; a yield of 50% is only fair. In part because of the problems and costs of waste disposal, industrial production facilities face considerable pressures to optimize the yields of products and make them as close to 100% as possible.
Is 100% a good percent yield? ›
There are a few reasons why percentage yield will never be 100%. This could be because other, unexpected reactions occur which don't produce the desired product, not all of the reactants are used in the reaction, or perhaps when the product was removed from the reaction vessel it was not all collected.
