Companies paying out more than half their earnings or offering very rich yields might be riskier then investors reckon, says Kelley Wright of Investment Quality Trends.

Kelley, in this world that we’re in today, everybody is increasing their dividends. More and more companies are paying dividends. We’re seeing dividend payout ratios start to inch up a little bit.

What should be an early warning sign for an investor, because everyone wants dividends? They like dividends, but they don’t think about when is too much or not enough.

Sure. It’s interesting. We go through these cycles where I like to say that it’s like Billy Graham went out and had a giant tent revival meeting, and everyone got religion, and now they all want to own dividends.

Good analogy.

But they don’t understand how to use them in terms of value. One thing that investors can look at always is the payout ratio. You know, what percentage of the earnings is paid out in the form of the dividend.

Now, really good, healthy, blue chip, mature…as long as they are kind of at, you know, around 50% or less, that’s good. I mean, if they get up to 55% or so, don’t worry about it. Utilities have a little bit of a different capital structure, and just usually as long as they stay around 75% or less, I don’t worry too much about it.

But if you see something where a company is starting to inch up and inch up and inch up and inch up, you know either the board is not necessarily confident enough to increase the dividend. Or they know that there is something coming down the pipe and they don’t want to do it. Or it’s just something else that the market hasn’t flushed out yet.

So it’s important to really look at the pattern?

Yeah, yeah. I mean, these days of when you buy something and then just tuck it away…

They’re over.

Hello! Yeah, I mean, come on. It’s a business. You know, you don’t start a business and then ignore it, you know? You have got to pay attention.

So when you’re talking about dividends, I mean people always tend to think dividends are just great, but there are things that investors do need to be concerned about.

What else do people need to know about dividends when they are looking at a company? Like there are mortgage REITs out there that are paying almost 20% in dividends. Do you think an average investor should just go and jump on that bandwagon?

Well, you know, not all dividends are created equal. And what one company calls a dividend, I think some of that is a return of capital or a return of principal depending on how they do it, and for some of them it is capital gains. OK?

That’s a big difference than when you have got an operating company. You know if you take what Coke (KO) and Johnson & Johnson (JNJ) and folks like that…do, and then what XYZ mortgage company does…I mean those are horses of a different color that you’re not comparing.

So just because it’s a great big dividend doesn’t mean you should automatically invest in the company?

Absolutely not. I mean, where is it coming from? And if somebody is paying you 19%—please.


In this environment. I mean, what are Fed Funds?

Very low. Extremely.

And what are junk bonds?

Related Reading:

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Economics

    Long-Term Investing Impact of the Paris Attacks

    We share some insights on how the recent terrorist attacks in Paris could impact the economy and markets going forward.
  3. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  4. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  5. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  6. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  7. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  8. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  9. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  10. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center