One of the most common mistakes income investors make is to look solely at yields.
With the current yield on a 10-year U.S. Treasury Bond barely over 2% and most bank deposits earning next-to-zero interest, stocks that offer 10% and 12% dividend yields certainly look like attractive investments. It's tempting to simply screen for stocks offering the highest yields and buy a diversified basket of stocks from different countries and sectors.
But that strategy is replete with pitfalls. First and foremost, stocks offering the highest yields are often those with fundamentally weak prospects -- firms that are vulnerable to cutting or eliminating their payouts. Remember, there are two ways the yield on a stock can increase -- either the price of the stock falls or the dividends rise. When shares in a dividend-paying stock fall sharply, it's often an indication that investors doubt the sustainability of the firm's payout.
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