Can a Yield Be Too High on High Dividend Stocks?

If you use some of the more popular stock screening software packages in your search for high dividend stocks, you may come across some companies that have yields that are very high. These companies need to be scrutinized very closely.

The question that comes to most people's minds is, when is a dividend yield too high? I would suggest that a dividend yield that is higher than 5% requires special attention. One important thing to note is that I am speaking about high dividend stocks from regular companies such as Bank of America and not things like REITs.

So what if your high dividend stocks have a yield above 6%? You need to look closely at things like what the historical yield has been and if the dividend payed has gone up (or down). You also need to confirm that the payout ratio is fine and has not increased drastically in the past few years. If any of these seem out of whack, then beware!

So what are your next steps? Go and find a good stock screener like the one at Microsoft Moneycentral and start digging for high dividend stocks. Then do some research on a company you know to ensure it is a strong one with a healthy dividend and not just a high one.

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