Although there are growing signs that interest rates may soon start edging upward, they remain so low that many investors are inclined to pick up a little yield wherever they can find it. Even those who have never ventured beyond the safety of bank accounts and money market mutual funds are now casting an eye at the stock market.
"Where can I find a list of stocks that pay high dividends?" is one of the questions that often comes my way. The answer is easy: Pull out the newspaper stock listings and run your finger down the dividend yield column. Or, if you are computer savvy, go to a Web site with a stock screening tool and enter your desired criteria (finance.yahoo.com is one of many).
But knowing which stocks pay high dividends is one of those situations in which a little knowledge can be a dangerous thing. Before investing a dime, find out why the dividend yield is high. This is particularly important if the yield is higher than the yield on stocks of other companies in the same industry.
Here are some reasons a company's dividend yield might be out of line:
* Investors have soured on the company. Yield is nothing more than the dividend divided by the stock price. If the stock price tanks, the yield goes up. Check the stock's price history. If there has been an investor exodus, find out why.
* The dividend is in danger. Dividends usually are paid in cash. If profits are down or a company is struggling with cash flow, it may slash its dividend, as TECO Energy did last year, or eliminate it entirely. A stock's price reflects in part what investors think the future dividend is likely to be. Reading research analysts' reports may be helpful.
* A call date is looming. Preferred stocks often have a "call" date after which a company can redeem its shares at a set price. If that happens, the dividends you are anticipating never will be paid - and you can lose money on the transaction if you pay more than the redemption price per share. A good source for preferred stock information is QuantumOnline (www.quantumonline.com)
* The dividends may not be the regular quarterly dividends with which investors are most familiar. Companies sometimes pay irregular dividends or one-time special dividends. You can't project those past dividends into the future.
* The dividends include return of principal. If you invest in any type of trust, be sure you understand its terms. The trust may liquidate its assets over time, which means your principal will decline.
Investing wisely in individual stocks takes a commitment to research and monitoring. Investors who are not prepared to do those things can put their money in mutual funds that emphasize dividend-paying stocks.
Q. Our 13-year-old daughter has $700 in a bank certificate of deposit. Over the last seven months she made about $4 and we'd like to do better. How do we go about buying a stock without paying a broker since there is such a small amount involved? Any ideas on a type of stock she should look at? Since she will not need this money for six or seven years this will be a long-term investment. We will add to her amount if there is a minimum and will cosign if necessary.
You can find a list of companies that sell stock directly at www.netstockdirect.com or you can use a brokerage such as Sharebuilder (www.sharebuilder.com) that specializes in small purchases at low fees. If you want to buy an individual stock for her, I suggest going with a company that makes a consumer product or supplies a consumer service that she can easily understand. In fact, you might want to give her a list of five or six companies you consider suitable and ask her to research them and choose the one she likes best.
If you are looking at this as an investment rather than an educational tool, I recommend investing in a mutual fund instead. A single-stock portfolio is quite risky and subject to wide swings in value. You can research funds at www.morningstar.com
You will need to open an account with yourself or another adult as her custodian under the Uniform Transfer to Minors Act.
- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to huntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.
