These five high-yield stocks are popular among income investors because of their large dividend payments, but their businesses are at risk of cutting these payments or even suspending them completely. If that happens their share prices will plummet, so Tim Plaehn is recommending investors avoid or sell these five widely-owned dividend stocks.
The generally accepted investment “wisdom” is that a high yield equals high risk. As a high-yield focused analyst, newsletter writer, and investor, I work to find those higher yielding stocks with the lowest potential risk of suffering a loss. Investors who want to own high-yield stocks need to analyze and understand how each company operates and how they generate free cash flow with which to pay dividends. To keep you from investing in relatively higher risk high-yield stocks, here are a couple of rules that I use to avoid buying stocks and then experiencing the unpleasant news of dividend cuts or even dividend suspensions.
Rule One: Avoid complicated business models and/or financial products.
For me, popular high-yield stock Dynex Capital Inc (NYSE: DX) which yields 14% is quickly eliminated from investment consideration by this rule. Dynex is a finance REIT that owns and manages a highly leveraged (6.7 times equity) portfolio of complex commercial and residential mortgage-backed securities (MBS). For me, I have no idea how to evaluate interest-only, non-agency commercial MBS, so I just stay away from Dynex Capital.
Relatively new finance REIT,Ladder Capital Corp (NYSE: LADR) with a 21% yield is another company that, because of its complicated business model, rule one pushes me away from taking a closer look at its income investment potential. The company operates in too many different commercial real estate sectors to be an expert in all.
The caveat to rule one is that you can become an expert in a complicated business, and with your expertise make informed investment decisions. Many investors find the operations of New Residential Investment Corp (NYSE:NRZ) that has a 15% yield to be too complicated. However, I have followed the company since before it went public with a spin-off in 2013 and I am comfortable making investment recommendations about NRZ and owing it in my own high-yield portfolio.
