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Dividends
Dividends
(David Gunn/David Gunn / iStockphoto)

Beware the siren song of sky-high dividends

I have cautioned on several occasions that securities that offer unusually high yields carry above-average risk. That’s an axiom of the stock markets that investors have to understand.

Stocks that offer payouts of 6 per cent+ may look very attractive but they carry a lot of baggage. The company may have a history of uneven earnings, high volatility, questionable management, or a high payout ratio. It may operate in a market sector that is highly cyclical or is out of favour. The yield is a tip-off that there are probably problems lurking beneath the surface even if they are not evident at first glance.