They say you're supposed to split your savings based on how old you are.
So if you are 65-years-old, 65% of your savings should be in safe investments like treasuries, bonds or a savings account.
But that rule isn't working anymore.
Let me explain...
The yield on the S&P 500 is a paltry 2.1% even though large U.S. companies are sitting on a record net cash position and earnings are at or near all-time highs.
Meanwhile, the U.S. Federal Reserve has pushed its foot firmly onto the economy's accelerator, lowering short-term interest rates to near 0% and embarking on two rounds of quantitative easing to push down long-term rates, with a third round right around the corner.
While ultra-low rates may have made it cheap for qualified borrowers to borrow money, they're also punishing savers. Yields on most savings accounts and certificates of deposit are well below 1%, and the picture isn't much better overseas. Yields on government bonds in the UK, France, Germany and the Netherlands continue to hover near record lows.
Against that backdrop, it's no wonder investors are eager to pick up shares of companies offering high yields, and many see high dividends as a sign of a company's safety and stability.
But buyer beware: Investors who simply search for companies offering the highest dividend yields are taking on far more risk than they might imagine.
Consider that back in 2007, a screen for U.S. stocks offering the highest potential yields would have revealed a number of financials and mortgage real estate investment trusts (M-REITs) offering payouts well into the double-digits. Many of these companies have since slashed their payouts, filed for bankruptcy or no longer exist as independent firms.
You see, dividend yield is calculated by dividing a company's annual dividend per share by its price per share. That means there are two ways a stock's dividend yield can rise: the price of the stock falls or the annualized dividend rises.
Many of the M-REITs and banks that made the list of high-yield stocks in late 2007 and early 2008 fit into the "falling stock" category.
In most cases, these companies' shares fell before they cut their dividend, as investors sensed trouble and bailed out of the group. In effect, these companies had high yields for the wrong reason.