Ask a Fool: Is a 10% Dividend Yield Too Good to Be True? | The Motley Fool (2024)
Here's a quick primer on avoiding dividend yield traps.
Q: There's a stock I have my eye on that pays a 10% dividend yield. This sounds too good to be true. Is it?
Generally speaking, double-digit dividend yields are indeed too good to be true. They are often either being paid by unstable companies, or simply represent too much of a company's earnings to be sustainable.
Of course, there are some exceptions. There are a few questions you should ask yourself to help you avoid dividend yield traps, which is a common term for stocks with too-good-to-be-true dividends. I'll use two stocks as examples to illustrate them.
For starters, does the stock pay an unusually high dividend for its industry? Most telecom stocks have yields around 5%, so CenturyLink's11% yield should certainly set off alarm bells. However, senior housing REITs tend to pay 6% to 7% right now, so Senior Housing Property Trust's8% yield isn't necessarily out of the ordinary.
Next, does the payout represent an excessive percentage of a company's net income? Senior Housing Property Trust pays out about 86% of its funds from operations -- a completely normal payout for a REIT. Meanwhile, CenturyLink pays out more than 135% of its trailing-12-month earnings, a potential red flag.
Finally, are there problems with the business from a long-term perspective? For example, some forms of brick-and-mortar retail are having trouble adapting to the e-commerce surge, so 10%-yielding DDR Corp, an owner of shopping centers, could have a tough time maintaining its payout. On the other hand, senior housing is a growing market, so Senior Housing Properties Trust doesn't have a similar long-term trend working against it.
To be clear, these are just a few examples of things to look for and aren't reasons to buy (or not buy) the stocks mentioned here. However, they can give you an idea if a stock's dividend could be in trouble.
Matthew Frankel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Is it? Generally speaking, double-digit dividend yields are indeed too good to be true. They are often either being paid by unstable companies, or simply represent too much of a company's earnings to be sustainable. Of course, there are some exceptions.
Yes, CWH has paid a dividend within the past 12 months. How much is Camping World Holdings's dividend? CWH pays a dividend of $0.13 per share. CWH's annual dividend yield is 4.93%.
What Is a Good Dividend Yield? Yields from 2% to 6% are generally considered to be a good dividend yield, but there are plenty of factors to consider when deciding if a stock's yield makes it a good investment.
Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account. This substantial amount is due to savings accounts' relatively low return rate.
For example, if a company declares a 10% stock dividend, a shareholder who previously owned 100 shares would receive an additional 10 shares, increasing their total ownership to 110 shares.
What are dividend stocks? Dividend stocks are shares of companies that regularly pay investors a portion of the company's earnings. The average dividend yield of some of the top dividend stocks is 12.69%. The best dividend stocks are shares of well-established companies that increase their payouts over time.
The formula for calculating the dividend yield is equal to the dividend per share (DPS) divided by the current share price. For example, if a company is trading at $10.00 in the market and issues annual dividend per share (DPS) of $1.00, the company's dividend yield is equal to 10%.
The dividend yield is a financial ratio that tells you the percentage of a company's share price that it pays out in dividends each year. For example, if a company has a $20 share price and pays a dividend of $1 per year, its dividend yield would be 5%.
Introduction: My name is Neely Ledner, I am a bright, determined, beautiful, adventurous, adventurous, spotless, calm person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.
