The Characteristics of an Unsafe High Dividend Yield

The dividend is a tremendous way to gain money over the long run while investing, so investors are extremely wise to try to use dividends to help them profit in the marketplace. A healthy dividend yielding stock is a stock that gives you some extra perks for buying it, as well as some extra price support during bear markets and economic downturns. What could possibly be negative about dividend yielding stocks? It isn't the dividend itself that is the negative, but there are certainly some characteristics you'll want to watch out for if you are looking to invest in stocks with the best dividend yields.

Characteristics of an unsafe dividend yield in a stock

The company is paying a large dividend despite the fact that they are losing money and there is no end in sight to their losses. Clearly a company that is losing money cannot afford to pay investors in its stock cash over the long run.

The stock has been hit extremely hard by the market, causing the stock to have a very high dividend yield. These kinds of stocks are almost always too good to be true. The market knows something is badly wrong with this company, and the likelihood of this dividend either decreasing or being pulled altogether is very high.

Declining revenue estimates for the coming quarters because of low demand for their products or services. In the end it comes down to the basic supply and demand question, and if demand isn't high enough, there isn't going to be cash to payout over time.

A payout ratio that is above 75%. How much of the company's free cash flow are they paying out to stockholders? If the number gets too high then one has to believe the dividend will be lowered, and very soon.

These are some of the most basic rules of an unsafe high dividend yielding stock. There's more to a dividend than what meets the eye. Dividends aren't all created equal, and the more you understand that as an investor the better off you will be. A stock with a dividend yield that cannot be maintained over time is also a stock that is likely to lose in its overall value in the market because people are likely to sell the stock when the news of the dividend cut takes place. In many ways this leads to the investor losing twice by losing both the dividend payout as well as taking a hit in the value of the stock.