Exercise Caution With High Dividend Stocks

Prime Value Asset Management portfolio analyst Shih Thin Wong said a classic valuation "trap" is emerging among some traditional income generating stocks. Investors need to be extra cautious and weigh up a stock's distributions versus its cost of entry, Wong said. "High-yielding stocks have the potential to be overvalued especially if a large number of market participants crowd out value from the dividend thematic," he said.

"A high dividend yield is similar to a stock that is cheap - it promises much but may deliver little. Some of the highest yielding stocks on the market may be some of the worst investments." Wong said stocks commonly targeted by investors for income - such as telecoms, utilities and selected gaming stocks - were trading at near-historically high valuations. "It is getting harder to find opportunities in those traditional high yielding areas, and investors may be tempted to overlook price and focus on dividend yield," he said.

Source: Investor Daily

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