In a tough market like we have right now you will hear a lot of experts say that high dividend stocks are the safest stocks to be in. This notion is true, but there is one big caveat, only if their dividend is safe. The amateur investor can login to Google Finance or Yahoo Finance and check for the highest yielding stocks and just buy the very highest, but trust me when I say it isn't that easy.
Like many other things in life, if a yield seems too high to be true, it probably is. Case in point is KeyCorp (NYSE:KEY), which on June 12th announced it would be cutting its dividend by 50% because it needed to save money and raise new equity. Those investors who had decided to purchase KEY just before that because of its great dividend were surely disappointed. This is just one example, and it can certainly be much worse in some circumstances. When companies are having a great amount of financial difficulties it isn't unusual to see them get rid of their dividend altogether.
Currently the highest yielding stock on the S&P 500 is MBIA (NYSE:MBI). The stock is yielding 32.61% despite the fact that it is widely being rumored to be a possible bankruptcy candidate in the near future. Do you really think this is a good stock to buy based on a great dividend payout? Of course it isn't.
So what kind of dividend stock is the type you want to look for? Look for a company that is growing earnings at the same time it is growing its dividend. You don't want the dividend yield to be high because the stock has fallen to the lowest of lows, rather you want a stock that has a good solid dividend yield because the company raises its yield consistently. A good example of this is Johnson and Johnson (NYSE:JNJ). The company yields just under 3% a year, but has raised its dividend payout for an unbelievable 46 straight years! Now that is a dividend stock that an investor can count on.
Don't be lured into thinking that the highest dividend yielding stocks are the best dividend stock investments. Do your research and check out the financial standing of the company. In order to growyourfunds you can't take the easy way out!
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