Topic: Dividend Stocks

QUIZ: What are the pros and cons of low-priced stocks that pay high dividends?

November 19, 2019|by Scott Clayton

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How much do you know about low-priced stocks that pay high dividends? Test your knowledge about the rewards—and risks—of these appealing stocks

How much do you know about low-priced stocks that pay high dividends? Test your knowledge below with our quiz.

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 A. Low-priced stocks that pay high dividends are most-commonly referred to as …

1. Blue chip stocks
2. Value stocks
3. Penny stocks
4. Energy stocks

You are correct if you answered 2.

Savvy value stock investors know that many consistently offer high yields, although capital gains may take longer to materialize.

Investors typically look to value stocks for their low trading prices in relation to their financial fundamentals.

Savvy investors know that value stocks can test your patience by moving sluggishly for months, if not years. But they can make up for it by rising sharply when investors increasingly discover their true value.

Fewer investors know that value stocks can offer high, sustainable dividend yields, along with steady growth. When value stocks pay dividends, you can accelerate your investment returns.

 B. Basic ratios used to find value stocks include …

1. Price-to-earnings ratios
2. Price-to-book ratios
3. Debt-to-market cap ratios
4. All of the above

You are correct if you answered 4.

When we look for value stocks to buy, we usually start by looking at a few basic ratios. For example:

• Low price-to-earnings and price-to-book ratios—a sign of a cheap or undervalued investment.
• Low debt to market cap ratio— Instead of focusing on debt-to-equity financial ratios exclusively, we recommend that you also look at the ratio between a company’s debt and its market capitalization or “market cap” (the value of all shares the company has outstanding). Like shareholders’ equity, market cap may differ widely from the net value of a company’s assets. However, a moderate debt-to-market-cap ratio will tend to provide a conservative starting point for analyzing a company’s chances of survival.

 C. Owners of low-priced stocks that pay high dividends should know important dates associated with dividends, like …

1. The record date
2. The declaration date
3. The payable date
4. All of the above

You are correct if you answered 4.

Pay attention to these three dates for low-priced stocks that pay dividends:

The declaration date: Several weeks in advance of a dividend payment, a company’s board of directors sets the amount and timing of the proposed payment. The date of that announcement is known as the declaration date.

The payable date: The payable date is the date set by the board on which the dividend will actually be paid out to shareholders.

The record date: Only shareholders who hold the shares before the payable date will receive the dividend payment. That date is known as the record date, and is set any number of weeks before the payable date.

 D. True or False: Sometimes low-priced stocks that pay high dividends are the result of hidden problems.

You are correct if you answered “True.”

At TSI Network, we feel that as valuable as stocks with high dividend yields are for a portfolio, that high yield can be a warning sign—and that requires you to take a very close look at the sustainability of a company’s dividend.1

While we do find that value stocks can offer you high dividend yields, if a dividend-paying, low-priced value stock seems like an exceptional bargain based on its dividend, earnings or asset values, it may suffer from hidden risks. The stock can plunge when those problems begin to take their toll—and that can include a dividend cut.

In short, stocks that pay dividends are a key part of a successful portfolio—but at the same time, they can give investors a false sense of security. That’s because some investors tend to think that all stocks with dividend yields are safe. However, dividend payments are not nearly as predictable as bank interest. In fact, investment income like dividends can dry up in a heartbeat. Companies are sometimes unable to honour their commitments, and they sometimes spring the bad news on you with no warning.

 E. Some of the possible issues associated with the highest dividend yield stocks include …

1. It may be reflecting widespread investor skepticism of a dividend’s sustainability
2. The company may not have cash flow to cover its dividend payments
3. The company may be going out of business
4. All of the above

You are correct if you answered 4.

When looking for stocks with high dividend yields, you should avoid the temptation of seeking out stocks with the highest yields—simply because they have above-average yields.

For example, a high yield may signal danger rather than a bargain if it reflects widespread investor skepticism that a company can keep paying its current dividend.

Dividend cuts will always undermine investor confidence, and can quickly push down a company’s stock price.

Use our three-part Successful Investor approach to find quality stocks—including low-priced stocks that pay high dividends

• Hold mostly high-quality, dividend-paying stocks.
• Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
• Downplay or stay out of stocks in the broker/media limelight.

Have you ever invested in low-priced stocks that pay high dividends only to sell them before their negative issues came to light?