Dividend Stocks: Safety or Sabotage?

There is no question that a well-chosen selection of dividend-paying stocks can be an asset to any portfolio. However, not all dividend-paying stock are the same. In some cases, corporations that have some kind of difficulty will hike the stock dividend in order to attract yield-hungry investors. It's important to keep in mind that while a strong dividend can signal good things about a company, an exceptionally high yield may signal the opposite.

Dividends are paid out of cash. If the company lacks cash, it will have to fund the dividend either through debt or selling stock, neither of which is sustainable. Before you buy into a company, examine how it has been funding its dividends. Look for any threats to the cash supply, such as high debt or factors that restrict its use of cash. (For example, a large portion of a company's cash might be in tax havens and not available without triggering large taxes.) You can do your own calculations or rely on analysts' consensus.

Source: The Street

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