What do you guys think about stocks that have dividend yields in the 10-15% range?
A lot of the stocks i see that do this are REITs, or other investment companies. Every once in a while i will see a non-investment company with a yield like this, but most of the time it is because the stock price dipped.
Seems pretty exciting to see a 1% return per month on my money, with no work involved.
I have heard many people say to steer clear because it is an unsustainable yield. Eventually the company will not be able to re-invest and the stock price will plummet.
On the other end though, i see a lot of these stocks have HUGE insider holdings, which makes me feel safe about the company. If the CFO is willing to hold onto 500,000 shares, he must know its a good idea.
Case by case basis, but in these low interest rate times, investing in shares with a focus on dividends is one way to play it. Obviously you want to avoid companies that are flaming out, and stick with solid performers that will at least hold their current stock price. Which means you need to analyse, forecast and use your best judgement. There is no simple answer.
Look at the history over the last 10 - 20 years, and of course the prospect for the future. Many of these ultra-high dividend stocks do not have a sustainable record of increasing or even maintaining the dividend.
But don’t give up. I own a bunch of shares in a stock I purchased decades ago, that is paying me about 25% per annum on my basis. It’s a pretty good dividend stock for someone to buy now (about 3.5%), but it’s fantastic from my perspective. Especially since dividends are taxed at only 15% (in the US, at the federal level).
10% to 15% dividend yield is almost always going to be a loser. Usually it results because the stock price has been depressed as people are getting out in droves. It’s possible that you could buy in on the bottom and the stock will recover, but most likely it’s a value trap. You’ll be a quarter or two away from a dividend cut, then the bottom drops out.
I’ve heard, over the years, that sometimes companies with really high dividends do it as a way to entice new investors (or keep the ones they have). And if that’s the reason they’re doing it, it could be that the rest of their numbers don’t give new investors any reason to come on board or, as you mentioned, they won’t be able to sustain such a high dividend for long. IMO, however, it’s unfortunate, when that people run from a stock because they decided to pay out 9% instead of 10% going forward. Either number is still huge. OTOH, if they decided to go from 10% to 2%, I could see leaving. In either case, you stand to lose money if that stock takes a dump (unless you think it will recover and you buy more at the low price).
Now, John Mace mentioned looking a the history. When you do that, don’t just check their stock price, (and this may be what John was talking about), check their dividend rate throughout the years. Many companies make is a priority to either never lower it or raise it on a set schedule (yearly/quarter etc). If a company is at 9% and you can see that they’ve been there, or worked towards is over the last 10 years, you’re probably safe.
You can quickly google for companies that do this. Not a really high dividend payer, but, off the top of my head I know, 3M consistently raises their yield.
CFOs cannot predict the future. There have been countless times when executives lose huge amounts of money when stock prices for their companies go down.
When a company is young executives who are heavily invested is a good sign that they believe in the company but in an established company it could just be that they are waiting for shares to vest, have an extreme tolerance for risk, or are overconfident with their own money.
HOW high are the dividend rates you’re talking about? Steadily higher than you’d get from a savings account? Great. So high you’re leery whether it’s sustainable? Not so great.
How long has this company been around? How long have they been paying high dividends?
Are the in a business that’s still growing and thriving, or one that’s in long term decline?
A company COULD be paying healthy dividends because they make hefty, steady profits. Or they may feel they HAVE to pay high dividends to keep shareholders from revolting.
REITs can pay very high dividends, but be careful. Check what kind of business the REITs are specializing in. IF, for instance, shopping malls are in decline (like most retail businesses), think twice about investing in a REIT that specializes in malls.
REITs are different from ordinary companies. The regulations on how and what they must pay out are different. As a result they often have what would be a scary big dividend if the company was an ordinary non-REIT business.
Somebody deeper in the biz than I will have to fill in from here.
I’m a fan of high-dividend yields, but you have to be careful. Is the underlying company targeting aggressive growth or steady dividends? Because despite what they tell you, they can’t do both. I particularly like utility stocks for healthy dividends.
This is correct - REITs are required to pay 90% of their taxable income in the form of dividends. In exchange for that, they get the privilege of not having to pay income tax on the remaining 10% that they keep. You have to pay income tax on the dividends, though.
The main thing to look for is dividend payout ratio. If it’s over 50%, a dividend cut could be in your future. That only applies to common stock though, with REITs I believe they have to pay out a high percentage of their revenues as dividends. But barring another housing bubble, REITs don’t really go up in price much and the dividend varies. So look at their history and see how likely you are to get high yields.