In a Down Market, Be Leery of Stocks or Funds with High Yields
When the stock market is volatile like it has been lately, it’s natural for investors to seek safe havens for their money. Stocks or funds with high yields can appear to be the safe return you are looking for. But approach these investments carefully, because stocks and funds in a sickening market often appear unrealistically high.
When the price of a security falls, often the yield goes up because companies still pay the same amount per share, but the market price is lower, which ultimately raises the yield percentage. Great examples of this lately have been financial funds/stocks. Many of these have lost 30-80% in their market value during the past year, but before the subprime bug bit their stocks, they were paying hefty dividends. As their market price continued to drop, their yields went up.
Stocks experiencing these tumbles often look attractive because 1) they appear to be an unbelievable value and 2) their yields look ridiculous. Be cautious before jumping on board because if the yield looks too good to be true, it probably is. Often times you will see a company lower their yield shortly after they take a hit. Companies may be able to sustain such yields for a few quarters, but in the end, it’s probable the yield will shrink and you will end up with a busted stock.
Generally, well established companies with a history of increasing yeilds are your safest choice. Dividend heavy ETF’s are also an option to avoid some risk, by spreading your money accross multiple stocks that all provide a decent yeild. $
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