Dividend Yields Tempt, But That's No Reason To Buy

By
A A A

The market correction has entered a zone that might be called "Temptation Alley."

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 will go.

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 the Dow:

Software makerMicrosoft ( MSFT ) 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 ( DD ) sports a yield of slightly more than 4%, again mostly because of a 22% price decline. Almost seven months ago, the yield was 3%.

Fast-food chainMcDonald's ( MCR ) serves a yield of 3.7%, thanks mostly to a more than 17% decline off its January high. Ten months ago, the yield was 2.7%.

Construction and mining equipment makerCaterpillar ( CAT ) is about 30% off its high and yields 2.6%. Nine months ago, the yield was 1.6%.

ChipmakerIntel ( INTC ) 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.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Personal Finance , Investing Ideas

Referenced Stocks: CAT , DD , INTC , MCR , MSFT

Investor's Business Daily

Investor's Business Daily

More from Investor's Business Daily:

Related Videos

Budgeting for Baby
Budgeting for Baby                  
A Home to Retire In
A Home to Retire In                 

Stocks

Referenced

Most Active by Volume

86,692,048
  • $16.82 ▼ 1.35%
66,073,054
  • $13.30 ▼ 6.27%
54,801,491
  • $14.59 ▼ 1.35%
54,305,010
  • $76.55 ▼ 3.15%
53,982,567
  • $3.42 ▼ 2.01%
53,146,472
  • $97.21 ▼ 1.60%
50,334,521
  • $99.18 ▼ 1.56%
44,049,276
  • $25.03 ▼ 0.56%
As of 10/1/2014, 04:15 PM

Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com