The market correction has entered a zone that might be called
For horse riders, Temptation Alley is a competition involving
turns and widths filled with things a horse is tempted to stop
for -- such as hay or grain.
To win, the rider and the horse must say no to temptation.
Dividend investors have their own version of Temptation Alley.
When a correction is going through its course, low stock prices
boost dividend yields to juicy levels.
If an income investor hopes to win over the long run, he or
she must be at least as smart as a well-trained horse. Buying on
dips is tempting, but no one knows how long or deep a correction
Sometimes people who buy on such dips are proud that they got
away with it. They take it as a sign that they are more clever
than the stock market.
Yet, the investor who mistakes the start of a bear market for
a brief dip is headed for an ugly outcome, especially if he or
she adds more shares on the way down.
Right now, the Dow Jones industrial average is well into
Temptation Alley. Just look at some of the annualized yields on
Software makerMicrosoft (
) is offering a yield of 3.4%, partly because the stock is about
19% off its high. Eight months ago, the yield was 2.4%.
Chemical giantDuPont (
) sports a yield of slightly more than 4%, again mostly because
of a 22% price decline. Almost seven months ago, the yield was
Fast-food chainMcDonald's (
) serves a yield of 3.7%, thanks mostly to a more than 17%
decline off its January high. Ten months ago, the yield was
Construction and mining equipment makerCaterpillar (
) is about 30% off its high and yields 2.6%. Nine months ago, the
yield was 1.6%.
) is more than 30% off its high. The stock yields about 4.5%. Six
months ago, the yield was 2.9%.
Other stocks in the Dow also are playing Temptation Alley.
If you feel the temptation to buy a stock for a juicy yield,
take a look at the stock chart. The ugliness will make it easier
to play defense.