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Dividend Cuts Demystified + How to Spot High-Yield Traps

I talk about dividend stocks all the time in Money & Markets. This is my steering wheel.

Shares that distribute dividends are an amazing way to increase your retirement income, but you should not buy anything and hope for the best.

Question from Money & Markets gives us a chance to show you why. color Ask:

Should I worry if a stock’s dividend payment, in percent, is about half of what it was a few months after I bought the stock?

Research analyst Matt Clark and I have the answer in this edition of Investment with Charles.

Note: Do you have a question about your nest egg? Send it to Feedback@MoneyandMarkets.com, And maybe I’ll answer that in a future video. We’ll even send you a Money & Markets hat if we use it!

Watch our full talk above or keep reading for highlights.

How dividend yields change

slows down: So John asks if he should be concerned when the stock’s dividend yield has been cut since he bought the stock.

Charles: Yes and no. This is a complex question.

John asks about the dividend yield, which is the current payment divided by the share price, expressed in percent. I will use here a complex return as an example.

If the dividend yield drops from 5% to 2.5% … this can happen in one of two ways:

  • The counter (dividend) has changed …
  • Or the denominator (stock price) has changed.

When the denominator (stock price) changes

Charles: If this happens because the stock price (denominator) has risen higher, then there is nothing to worry about. This is something to rejoice over!

This means that your stock price has gone up a lot, and now this return is lower as a result. You may want to take profits. There is nothing wrong with making a profit if you feel that the stock is ahead of itself now. It may not be as attractive as it was when you bought it.

Is this low return a cause for concern? definitely not. This is a reason to celebrate!

When the counter (dividend) changes

Charles: Now, the other potential situation is that the yield was cut in half because the dividend (counter) was cut in half.

It is rare that when a stock cuts its dividend, usually the price also goes down. So the return in the end is unchanged because everything is lower.

If a company cuts its dividend from $ 5 per share to $ 2.50 per share, the share price is going to fall in proportion (or even more) to where that return, in percent, will remain unchanged.

Do you need to worry?

Yes…

When a company cuts its dividend … run!

Charles: When companies cut dividends, it’s something to worry about.

This does not mean that the stock rises to $ 0, but it does mean that the stock is under pressure.

The dividend is the last thing management wants to cut. It sends such a harmful message to shareholders.

When shareholders see management cut the dividend, they say, “Okay, I’m out. Management has lost its way. They have lost confidence. I’m going to cut my loss here, sell the stock and move to greener pastures.”

And there is a certain justification for this.

When a company is growing, healthy and has cash, it can afford to maintain or raise that dividend.

When management cuts that dividend, it’s because things are not good. The cash does not come in to support the stock. Something has changed fundamentally, and society is in trouble.

There can be some value opportunities when the stock goes down, but as a rule, this is not a stock you want to keep income from.

Do you want to own something that reduces his payment? probably not.

You want to own something that gets stronger or even raise His payment over time.

The Bottom Line: If the dividend yield falls, it can be for two reasons: either the dividend has been cut, or the share price has risen.

If the stock price has gone up, you are golden. magnificent. This is what we all want. That’s why we do it, right? If it’s because the dividend has gone down, you might want to check out a stock sale.

What happens when dividends skyrocket?

slows down: Does the opposite work if things go wrong? If the dividend might increase, does that make the play a bit?

Charles: If the dividend yield goes up, it can happen in one of two ways.

If the share price is unchanged and the dividend yield rises, it means the payment has increased. The company raised the dividend.

magnificent! This is what we want to see.

Especially in a time of inflation, you want a steady income. But you want that income to go up over time. This is a huge positive when you see the yield go up because of an increase in the dollar amount of the dividend. It’s a sign of health, and it’s an unequivocal positive.

Now, when you see this return go up because the price has gone down … it can be good or bad.

Suppose the dividend is $ 2.50, but the company generates profits of $ 3, $ 4 or $ 5 … so this company has more than enough cash to support that dividend. you have nothing to worry about. If that return goes up, it’s a buying opportunity.

But sometimes, when a dividend yield goes up, it is not sustainable. The market announces a dividend cut in its future.

If that dividend is $ 2.50, but the company only makes $ 1.00 in profits, how long will it be able to pay $ 2.50 if it only makes dollars?

Not much time. This dividend is expected to cut.

High yields also vary from industry to industry: 4% may be particularly high for one industry but fine for another.

The Bottom Line: If a company’s return is abnormally high based on its history or based on its peers, it may be a sign that the dividend is about to be cut.

Where to find us

Next week, Matt will have more on his new podcast, so stay tuned.

Do not forget to check out ours Ask Adam anything A series of videos in which chief investment strategist Adam Odell answers your questions.

You can also catch Matt every week on his Marijuana Market Update. If you are in the business of investing in cannabis, you do not want to miss his weekly insights.

Remember, you can email my team and me at Feedback@MoneyandMarkets.com – or leave a comment on YouTube. We love hearing from you! We may even present your question or comment in a future release of Investment with Charles.

To ensure profits,

Charles Saysmore_Sig

Charles Sizemore, co-editor, Green Zone Fortunes

Charles Sizemore Is the co – editor of Green Zone Fortunes And specializes in income and retirement issues. He is also a frequent guest on CNBC, Bloomberg and Fox Business.

Dividend Cuts Demystified + How to Spot High-Yield Traps Source link Dividend Cuts Demystified + How to Spot High-Yield Traps

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