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.
FAQs
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.
What are the best dividend funds for The Motley Fool? ›
Eight top dividend index funds to buy
| Fund | Dividend Yield | Expense Ratio |
|---|
| Vanguard High Dividend Yield ETF (NYSEMKT:VYM) | 2.86% | 0.06% |
| Vanguard Dividend Appreciation ETF (NYSEMKT:VIG) | 1.80% | 0.06% |
| iShares Core Dividend Growth ETF (NYSEMKT:DGRO) | 2.33% | 0.08% |
| Vanguard Real Estate ETF (NYSEMKT:VNQ) | 4.06% | 0.12% |
5 more rowsApr 9, 2024
The Motley Fool has positions in and recommends Alphabet, Amazon, Chewy, Fiverr International, Fortinet, Nvidia, PayPal, Salesforce, and Uber Technologies.
What is considered a good dividend yield? ›
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. Your own investment goals should also play a big role in deciding what a good dividend yield is for you.
Is Verizon a good dividend stock? ›
Verizon offers a 6.7% dividend yield which is slightly better than you'd receive from AT&T at recent prices. The industry leader also has its largest rival beat when it comes to dividend growth consistency.
What is the most reliable dividend stock? ›
15 Best Dividend Stocks to Buy for 2024
| Stock | Dividend yield |
|---|
| Coca-Cola Co. (KO) | 3.3% |
| Johnson & Johnson (JNJ) | 3.4% |
| Prologis Inc. (PLD) | 3.7% |
| Realty Income Corp. (O) | 5.9% |
11 more rowsApr 19, 2024
Top 10 Dividend Stocks In The United States
| Name | Dividend Yield | Dividend Rating |
|---|
| Columbia Banking System (NasdaqGS:COLB) | 7.66% | ★★★★★★ |
| AGCO (NYSE:AGCO) | 5.39% | ★★★★★★ |
| Silvercrest Asset Management Group (NasdaqGM:SAMG) | 5.19% | ★★★★★★ |
| Resources Connection (NasdaqGS:RGP) | 5.07% | ★★★★★★ |
6 more rows23 hours ago
10 Best Growth Stocks to Buy for 2024
| Stock | Implied upside from April 25 close* |
|---|
| Tesla Inc. (TSLA) | 23.4% |
| Mastercard Inc. (MA) | 19% |
| Salesforce Inc. (CRM) | 20.8% |
| Advanced Micro Devices Inc. (AMD) | 30.1% |
6 more rows5 days ago
Performance List of Multibagger Penny Stocks for 2024
| Name | Book Value | 1 Year (%) |
|---|
| J Taparia Projects | ₹ 18.56 | 345.61% |
| Rasi Electrodes | ₹ 9.45 | 52.90% |
| 3P Land Holdings | ₹ 37.75 | 24.68% |
| SAL Steel | ₹ 4.87 | 110.65% |
6 more rowsApr 24, 2024
10 Best Dividend Stocks to Buy
- Verizon Communications VZ.
- Johnson & Johnson JNJ.
- Philip Morris International PM.
- Altria Group MO.
- Comcast CMCSA.
- Medtronic MDT.
- Pioneer Natural Resources PXD.
- Duke Energy DUK.
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.
How to make $5000 a month in dividends? ›
To generate $5,000 per month in dividends, you would need a portfolio value of approximately $1 million invested in stocks with an average dividend yield of 5%. For example, Johnson & Johnson stock currently yields 2.7% annually. $1 million invested would generate about $27,000 per year or $2,250 per month.
Is 30% a good dividend yield? ›
A range of 0% to 35% is considered a good payout. A payout in that range is usually observed when a company just initiates a dividend. Typical characteristics of companies in this range are “value” stocks.
Who is better AT&T or Verizon? ›
Verizon's network generally ranks higher in third-party tests, its millimeter-wave 5G covers more ground than AT&T's, and its 5 GB $55 per month shared-data option (tied for sixth in our Best Cell Phone Plans of 2024 list) is more likely to cover many people's mobile-broadband needs than AT&T's 4 GB $40 plan.
How many times a year does Verizon pay dividends? ›
Verizon Communications Inc. ( VZ ) pays dividends on a quarterly basis.
What is the fair value of Verizon stock? ›
Verizon Intrinsic Value - Valuation Summary
| Range | Upside |
|---|
| Fair Value | 13.45 - 13.45 | -66.11% |
| P/E | 32.27 - 47.25 | -0.0% |
| EV/EBITDA | 33.54 - 68.3 | 18.8% |
| EPV | 46.86 - 76.96 | 56.0% |
7 more rowsSign up for Kiplinger's Free E-Newsletters
| Company (ticker) | Analysts' consensus recommendation score | Analysts' consensus recommendation |
|---|
| Amazon.com (AMZN) | 1.30 | Strong Buy |
| Microsoft (MSFT) | 1.32 | Strong Buy |
| Delta Air Lines (DAL) | 1.35 | Strong Buy |
| Nvidia (NVDA) | 1.38 | Strong Buy |
15 more rowsA retest of $4,960, and possibly $4,930, makes sense before buyers rally back to all-time highs.
- A note on earnings trades. ...
- Top 10 stocks to watch in March 2024. ...
- Qualcomm (QCOM) ...
- Wayfair (W) ...
- Apple (AAPL) ...
- Coinbase Global (COIN) ...
- DraftKings (DKNG) ...
- Disney (DIS)
Our list for 2024 includes a diversified mix of familiar stocks and some surprises, once again leaning toward, but not exclusively to, the value camp: Alibaba Group Holding, Alphabet, Barrick Gold, Berkshire Hathaway, BioNTech, Chevron, Hertz Global Holdings, Madison Square Garden Sports, PepsiCo, and U-Haul Holding.
What is Motley Fool's all in buy stock? ›
We regularly see similar ads from the Motley Fool about “all in” buy alerts, sometimes also called “double down” or “five star” buys, and they're generally just the type of steady teaser pitch that they can send out all year, over and over with no updates, to recruit subscribers for their flagship Motley Fool Stock ...
