Stocks That Pay Dividends Can Carry Risk

While investors searching for yield may gravitate to dividend-paying stocks, several strategists say that paying too much could be risky. This according to an article in The New York Times.

The search for yield, it says, “should be approached warily, with an eye toward stocks that pay decent, but not extremely high, dividends and that, most of all, have the capacity to increase their payouts regularly.”

Carin Pai, director of equity management at wealth management firm Fiduciary Trust Company International warns, “If you’re looking just at yield, it could be a sucker bet.”

According to the article, the reason that high-yielding funds are being avoided is twofold; (1) interest rates were rising until very recently, and (2) many high-yielding funds own value stocks, which tend to trade at discounts because they are in “economically sensitive industries, such as heavy manufacturing and engineering, commodities, transportation and construction” and their share prices fluctuate more than some others.

Jeff Porter, chief investment officer at Sullivan Bruyette Speros & Blayley says, “As people have chased utilities and consumer staples, that desire for safety has bid those up to prices that are no longer adding value.” He prefers companies that are more likely to increase their dividends, even if yields are moderate. The article cites a recent report by Bank of America that notes, “stocks with sustainable or growing yields are trading at a rare valuation discount to high-yield stocks. That could provide a cushion should rates fall.” BofA expects the Fed to raise rates later this year, and its strategists recommend “dividend growth stocks with some cyclicality that can raise payout ratios as rates rise.”