If you're anything like us, you probably enjoy running your eye down the dividend yield column of your favourite financial pages. As far as yardsticks for value go, a high dividend yield is one of the most straightforward. Unfortunately, simplicity doesn't equate to reliability and many investors end up buying high-yielding stocks that turn out to be absolute dogs.
It's a topic we discussed in our More to income than yield article of issue 136/Sep 03, which we recommend reviewing. In this article we're going to suggest some specific questions you might like to ask next time a stock with a high yield jumps off the page at you.
First and foremost
The first and most important question is: 'Do I understand exactly what this investment is?' This gets back to the words Ben Graham wrote in chapter 20 of our namesake, The Intelligent Investor: 'Investment is most intelligent when it is most businesslike.'
Many people shop around to save a few hundred dollars on their whitegoods, or even a few cents per litre on the price of petrol, but then invest thousands of dollars after minimal research and only a few minutes of thought. We suspect the problem is that a lot of people don't know where to begin, so they take a deep breath, place the buy order and hope for the best. If you take the following pledge, we guarantee your investing results will improve:
From this day forward I shall never place a single dollar in an investment which I do not understand. I will undertake any required research and not be afraid to ask 'silly' questions of anyone who has recommended a stock or product to me until such time as I am comfortable with the nature of the investment and the risk it entails.