For the first time in over a half century, the stock market yields more than the bank. Thanks to the Fed’s monetary stimulus, interest rates and bond yields have fallen to paltry levels, making dividend yields all the more attractive.
But while I’m a fan of juicy dividend yields myself, a word to the wise: You should never pick stocks based on just their dividend.
While high dividend yields can be attractive, that shouldn’t be the only thing you’re looking for when picking stocks. With some companies, a high dividend yield isn’t always a good thing: Sometimes a high yield is actually caused by a drop in stock price.
Moving beyond the yield and current dividend payment, you want to look at the company as a whole and its history of dividend payments. Consistent and steadily increasing payments are a prime sign of a strong company that makes dividends work for you.
And above all else, before buying any stock, you need to take a hard look at its fundamentals. You can do this by running your stocks through my Portfolio Grader tool. This tool screens stocks based on their profit potential, providing a “Fundamental Grade” that measures a company’s health and a “Quantitative Grade” that indicates whether institutional investors are buying this stock.
To get you started, I’ve run the top dividend stocks in the S&P 500 through Portfolio Grader and have come up with no fewer than 10 stocks that need to be sold right away.
|Ticker||Company Name||Quantitative Grade||Fundamental Grade||My Take|
|GM||General Motors Company||F||D||Str. Sell|
|CA||CA Inc.||F||C||Str. Sell|
|COH||Coach Inc.||F||C||Str. Sell|
|MAT||Mattel Inc.||F||D||Str. Sell|
|TGT||Target Corp.||F||D||Str. Sell|
|DRI||Darden Restaurants Inc.||D||D||Sell|
|GIS||General Mills Inc.||D||C||Sell|
So it just goes to show that dividends alone won’t ensure profits in this market—we all need to pay attention to fundamental metrics as well.