3 Ways to Avoid Falling Into Dividend Traps
Dividends can make investing in certain companies worthwhile. Many dividend-paying companies may not have the same hypergrowth potential as younger, smaller companies, but they can be a great source of reliable income, which can be especially attractive to those in retirement. If you're looking to become intentional with your dividend investing, you'll want to do your best to avoid dividend traps.
A dividend trap is a too-good-to-be-true dividend yield that's unsustainable. They're not always the easiest to spot, but doing these three things will definitely help.
Although it's the most common metric cited for dividends, dividend yields can be misleading. When companies set their dividend, they generally do it as a dollar amount. If a company pays out $1 in annual dividends and its stock price is $20, its dividend yield is 5%. However, if the stock price drops to $10 for whatever reason, the dividend yield is now 10%.
Source Fool.com
