Waiting outside the football stadium after every home University of Southern California football game, is a row of street vendors eager to sell their bacon wrapped hot dogs they are grilling along with onions and peppers right in front of you.
The smell of all that bacon cooking is simply intoxicating.
Then they start calling out to you “Hot dogs! Get your bacon wrapped hot dogs! Hot dogs! Get your bacon wrapped hot dogs!” and it makes you want it even more, even if you’re not hungry. (For those of you who are not fans of hot dogs or bacon simply imagine the smell of freshly baked cookies that makes you want to eat one even if you are not hungry.)
So far I have been able to resist the calling of these deliciously smelling treats but I know one day when I am faced with a combination of hunger and the sight of a perfectly cooked dog I’m afraid I just might crack and purchase one.
Wall Street firms are also trying to sell products to a population hungry for income and they also have a catchy chant “Yields! Get your juicy yields here. Yields! Who doesn’t want higher yield today?”
I don’t believe all products (stocks, bonds, or funds) that have enticing yields are bad I just think some products have been handled, prepared and packaged safer than others.
Here are issues to consider when looking at enticing yields:
- Is the yield high because the price of the bond or stock has fallen dramatically? These are the most worrisome to me as falling prices tend to reflect falling sales and profits which tend to lead to the cutting or eliminating of dividends or interest payments.
- Is the yield high because there was a special dividend that may or may not happen again?
- Is the company paying out too much of their profits as dividends so there is nothing left to reinvest in the company to keep it competitive? If the company doesn’t stay competitive, eventually sales and profits will fall which tends to impact their ability to pay dividends and or interest payments.
- Is the yield high because the company or fund is using borrowed money to leverage it up? Leverage tends to work very well for investor’s in good times but tends to be very bad for investors in bad times.
- Is the yield high because it is really just a return of your principal instead of just profits and/or income the fund has generated? This point really just applies to funds rather than individual stocks or bonds. If you notice your principal shrinking steadily every month you may want to ask out the company or fund is paying for the dividends they are sending you.
- How high is the yield of the stock/bond or fund relative to its peers? If the yield is much higher than you need to find out what the company is doing differently to come up with a higher yield.
- When was the last time the dividend was raised and/or lowered? I would rather own something that pays a steady dividend than one that is raising and lowering dividends all the time.
Note: This article was originally written as a guest post at www.dividendninja.com