Warning: Avoid This High-Yielding Dividend Trap At All Costs

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Everyone is always looking for a quick and easy way towealth . This desire is what drives the multi-billion-dollar worldwide gambling industry.Investment trends and fads are no different. 

Investors tend to move as a herd in and out of the latest get-rich-quick scheme. One of the most popular trends is the search for high-yieldingstocks .

This trend is driven by lowbond andcash rates, risk fears stemming from the financial crash andrecession , and the aging population seeking steadyincome from theirinvestments . When managed wisely,yield investing is a proven method to help build wealth and generate income. 

The worst way to participate in this lucrative trend is to simply chase the highest-yielding stocks. In the yield-investing world, bigger is not always better. In fact, ultra-high-yielding stocks are often flashing danger signals -- because yield increases as thestock price decreases. 

It's critical for investors to understand that high yield does not always equate to high-quality stocks. To avoid becoming one of those high-yield seeking investors who get burned when their favorite ultra-high-yielding stock crashes, always look at the company's fundamental and technical picture. Looking at only the yield is a quick way to the poorhouse. 

One example of an ultra-high-yielding stock that should be avoided by all but the most nimble short-term traders is Diana Containerships (Nasdaq: DCIX) .

@ Diana Containerships
The high-yielding Diana Containerships is right in the center of this global slowdown.

This shipping company has an astounding 27.9% trailing annualdividend yield . Talk about a powerful attraction for high-yield seeking investors. However, all is not as it seems with the stock. 

The slowdown in the world'seconomy has hurt the containershipmarket . The International Monetary Fund projects worldGDP growth to be just 3.1% in 2013. In addition, theIMF is projecting a continued slowdown in China and a negative 0.7% growth in the eurozone. None of these things bode well for the worldwide product shipping business. 

The high-yielding Diana Containerships is right in the center of this global slowdown. While the company is optimistic that a recently securedloan facility , new shareissue and acquisitionswill enable it to continue paying out the dividends, the internal numbers tell a different story. 

Time charterrevenues fell to just over $12 million in the second quarter from close to $15 million ayear ago. In addition, anet loss of $5 million was reported during the same quarter. On top of the weak performance, the company has announced that the nextdividend will be cut by 50%, to 15 cents per share. Investors who are not paying attention to their holdings could easily be surprised by this lowered dividend. 

A look at the technical picture shows Diana Containerships has been in a downtrend since June 1. It is trading solidly below the 50- and 200-day simple moving averages with slight technicalsupport evident in the $3.60 range.

Risks to Consider: High yield without the support of fundamentals and company growth can be a dangerous signal for investors. While Diana Containership may become profitable given an improved world economy and prudentmoney management, the risk is simply too high right now for yield-seeking investors. 

Action to Take --> If you own Diana Containerships, you may wish to close your position. I do not see anyupside for this company over the next 12 months. If you see things differently, watch the stock carefully and be ready to sell should matters get worse.



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.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.


This article appears in: Investing , Investing Ideas , Stocks

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