When Buying Stocks, Don’t Chase Yield – Or You Will Quickly Get Burned

If you are going to buy stocks, you are at some point going to become infatuated with dividends.  It's part of the process.  But here's a tip.  Don't chase yield.

If interest rates are at two percent, and the overall market is yielding, two percent, there is a reason why a specific stock is yielding 5% or more.

A Bizarrely High Yield Is A Warning Sign

It's usually because the company is heavily leveraged or the prospects for that industry are dim.  Another reason could be because the company's business model is built on constantly issues new shares or debt to raise capital for future growth (rarely sustainable).

I predict it now.  You will buy a stock because of the juicy dividend, and you will someday regret it.  It happens to us all.

But I told you.  Don't chase yield.

(This doesn't mean don't invest with an eye on dividends.  It means that high yielding securities are risky and will suck you in.  Avoid it.  You want to invest in great companies with bright prospects.)