Beware of the Dividend Trap

Typically, people will select their interest-bearing securities for all the wrong reasons. I can remember vividly when I wrote a piece talking about how silly it was to be a buyer of Citigroup (C) just because it paid a dividend. It wasn’t the piece that was so memorable but the response I got from some very angry readers. One proceeded to tell me that I clearly had a "hidden agenda" and that even if Citigroup "fell another 20% he’d sleep soundly at night knowing his dividend was safe." Well in a way he was right -- my hidden agenda was to protect someone like him from getting clobbered, but I guess he didn’t see it that way.

Over the years I’ve seen many fall into the dividend trap. The stock could be getting annihilated but someone will find security in the hefty dividend the company is supposed to pay. It all sounds backwards to me that someone would be willing to lose 10% to gain 3% over the course of a year. Net net, isn’t it still a 7% loss?

Source: Minyanville

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