Investors sometimes seek out stocks that pay higher dividends (a distribution of earnings to shareholders) and then hold shares over a long period of time. Seems like a smart thing to do.
However if the stock slides and the dividend stays the same, there could be trouble in paradise. Dividends are paid with cash and that cash comes from earnings. If the company doesn’t have a healthy earnings flow, then paying those dividends could send the stock to the poor house.
Many investors use a dividend yield as their guide. A dividend yield tells you what percentage the stock returns relative to its price.
I think the lower the yield the better, says Jeff Macke. Don’t buy stocks for yields. Personally, I would never buy a stock just for a yield. I think you get bullish on troubled companies that cut their dividend.
If you want to buy a stock that pays dividends how should you play it?
Stay with dividend yields below 10%, replies Jeff Macke.
Look at San Juan Basin Trust , says Joe Terranova, it pays about a 6% dividend.
Or Frontline , adds Guy Adami. It’s a buy on a pull back.
Check out FPLGroup and Consolidated Edison , says Pete Najarian. They're boring, but I like them both.