High Yield Stocks Are Home Wreckers

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• Hi, My name is Aaron and Im with Dividend Stocks
  Research, today were reviewing our recently
  published article

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High Yield Stocks Are Home Wreckers
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You know what really sinks a lot of dividend
stock investors? High yield stocks. Somebody
thinks hes found the best dividend stock because
theres a high yield.
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The high yield looks good for a week, maybe even
a month after the dividend investor buys it. Then
theres a dividend cut because the high yield
gets too expensive for the company.
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The company is living beyond its means, and it
just cant afford to pay those kind of fat
dividends any more. And when theres a dividend
cut, the stock price usually takes a hit.
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Youve got a high yield dividend stock
disaster. And you probably know what happens
next.
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The investor sells the stock for a loss and
rushes off to pick up what he thinks will be one
of the next best high dividend stocks. You see
whats happening here?
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The cycle repeats itself. One losing trade leads
to another. The best way to break this pattern
is to stop focusing on high yield.
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A Better Approach To High Yield Stocks
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For starters, stay away from any stock that pays
a yield of more than 10. But even when you see a
yield thats more than 5, you want to be
careful. And you want to think about hanging
onto your dividend stocks longer.
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When Warren Buffet buys a stock, he buys it to
hold forever. Well, thats how its been for
Buffet the past 50 years. Back in the 1950s and
1960s, he was more of a buy and sell guy.
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Mario Gabelli is another terrific investor you
may have heard of. He runs big funds and hes
basically a value investor. A value investor
looks for stocks the market undervalues.
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Quite often, it might be a situation where the
market has overreacted to bad news and has been
too harsh driving down the stocks price. The
value investor shakes down the stock and sees a
rosier future than the market does.
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Mario Gabelli typically looks for a 50 return on
a stock within 2 years before he even thinks
about selling.
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Holding on for at least two years, even if you
dont enjoy the kiss of a 50 return, gives you a
good shot at more appreciation potential in the
years ahead.
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• When it comes to finding stocks with the best
  dividends, Im happy to pay attention to guys
  like Buffet and Gabelli.

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Mario Gabelli owns some interesting dividend
stocks, and they dont tend to pay high yields.
Hes been buying Freeport-McMoRan, FCX, a
natural resource company into mining and energy,
and Petsmart, PTSM, the pet supply retailer.
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Both stocks deliver yields of less than 1. But
Gabelli figures hell do just fine with dividend
growth and share price growth. Hes not getting
in line to chase high dividends. Hes trying to
find stocks he figures will do well, and throw
off some income, over the next few years.
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So we can go to school on Gabelli. We can use
his stock picking technique to make smarter
choices on your dividend stocks. Heres one way
to do it the same way investors like Mario
Gabelli does.
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Its a simple way to zero in on the best stocks.
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Playing It Safe To Find The Best Stocks That Pay
Dividends
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Use this easy way to take the temperature on the
safety of a high yield stock that most investors
dont know about. I call it the dividend cash
cushion.
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The dividend cash cushion shows you if the
company is dipping into its savings, or even
borrowing money, to pay the dividend. If so,
watch out. You want the company paying for the
dividend with cash thats coming in.
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Heres how to do the easy arithmetic. Divide the
total annual amount of dividends paid by the
total annual free cash flow. You can find both
these numbers on your favorite finance site.
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And dont forget to keep an eye on the dividend
payout ratio. Thats where you see what
percentage of quarterly income goes to pay
dividends. You can turn up some scary stuff...
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Even when youre not looking at high yield
stocks, and yields are down below 4. Reynolds
American, RAI, pays a dividend of 3.54 and has
a dividend payout ratio of 69.7.
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Eli Lilly, LLY, pays a dividend of 2.77 and has
a dividend payout ratio of 63.5. Paychex,
PAYX, pays a dividend of 3.08 and has a
dividend payout ratio of 82.2.
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See what happens? You turn up big, impressive
companies that might seem pretty solid, but are
actually flashing some nasty warning signs. No
wonder billionaire investors like Mario Gabelli
seem to think the best dividend stocks crank out
lower yields.
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And no wonder hes not concerned that the
Freeport-McMoRan stock has been skidding.
Thats the nature of the beast. The way its
behaves. Take a look at this 10-year chart...
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Based on the stocks history, you can see why
Mario Gabelli figures Freeport-McMoRan is in a
good position to increase in value by 50 over
the next two years. And pay some nice dividends
along the way.
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Its a great reminder of the trouble you can get
into when youre so focused on stocks with the
highest dividend yield that youre blindsided to
everything else thats going on.
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Theres plenty of trouble to get into. And none
of it is worse than the trouble that comes with a
dividend cut. How bad can it get?
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High Yield Stocks Can Clean You Out
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Sometimes, the dividend cut is the alarm that
goes off before bankruptcy. It happened with
RadioShack, and with Washington Mutual.
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Seven years after it shattered the dreams of its
shareholders, Im still disgusted with Washington
Mutual. They hurt a lot of people.
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Why none of their executives were hit with
criminal charges for cooking the books is one of
the mysteries of our time.
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In 2011, after three years of investigating, the
feds on the task force examining the WaMu failure
claimed they couldnt come up with any evidence
of criminal violations.
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But the dividend cut was the handwriting on the
wall. At the end of 2007, Washington Mutual
slashed its 56-cent dividend down to 15 cents.
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The fat 5 yield was gone. And less than a year
later, Washington Mutual declared bankruptcy.
According to Standard Poors, during that ugly
last quarter of 2008, 288 companies cut their
dividends. In 2009, another 804 dividend
payments were cut.
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No, all these companies didnt go bust. A
dividend cut doesnt mean bankruptcy is in the
cards. But it usually does mean theres trouble.
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You never want to downplay the importance of a
dividend cut. And you never want to forget that
the higher the yield, the better the chances of a
cut.
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Stay away from those high yield stocks that can
turn into home wreckers. Stick to the dividend
stocks that are in a position to keep growing
their dividends.
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Thats how youll create income. Thats how you
grow your portfolio. Use my dividend cash
cushion, and you can be tipped off about trouble
before it happens.
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