The Hidden Danger Lurking in Some High-Yield Dividend Stocks
Yahoo Finance ·
I love dividend stocks, but my approach to this investment theme has changed over the years. When I was younger and had less responsibility, I focused on buying stocks with dividend yields of 10% or higher. I used some techniques to limit my downside risk and diversified, so I made out OK. However, I also learned some important lessons. If you are looking at stocks with ultra-high yields like Annaly Capital ( NLY +1.73% ) , AGNC Investment ( AGNC +2.59% ) , Ares Capital ( ARCC +1.22% ) , or even Conagra ( CAG +2.03% ) , here are things you should consider before you buy. AGNC and Annaly are both mortgage real estate investment trusts (REITs) with yields over 10%. They are both well-respected companies in this unique niche of the REIT sector. For the most part, they fund their dividends by purchasing bond-like securities created by pooling mortgages. They both make use of leverage to amplify returns. Interest rates, housing market dynamics, and repayment rates are just some of the factors that can impact mortgage REITs. You need to do a little more homework if you are going to buy a mortgage REIT because they operate very differently from property-owning REITs. That said, there is one very important factor that dividend investors need to understand: mortgage REIT dividends are inherently volatile. The share price of an mREIT will likely track its dividend, rising and falling over time. That will likely keep the yield high, but it could result in capital losses. The most recent dividend downtrend for these mREITs has been particularly long.
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