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

By: StreetAuthority
Posted: 8/23/2013 2:00:00 PM
Referenced Stocks:

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.