A Dividend Threat-Down

Editor's note: A previous version of this article incorrectly stated that American Italian Pasta pays a dividend. It does not. We regret the error.

I'm not much for most TV shows. But The Colbert Report is an exception. Stephen Colbert's authoritative parody of talking heads is like a cold drink on a hot day.

OK, enough with the applause
Why am I telling you this? Because I'm so stock-obsessed that I think about investing even as I watch Colbert lampoon pundits and politicos. Last night, dividends were on my mind.

I've written before that dividends can't save a portfolio from bad stock picks. But I realized I hadn't given enough practical advice for how to avoid dividend disaster. So, investors, prepare to be scared silly...

... This is your dividend threat-down

3. The third-biggest threat to your income portfolio is wasteful spending. You know, blowing your hard-earned moola on high-yielding losers like General Motors (NYSE: GM  ) . (Take a look at this chart to see what I mean.) But fear not, Fools: Learning valuation techniques will help send this threat packing. Indeed, one of our heroes at Motley Fool Income Investor is teaching the essentials of discounted cash flow analysis as I write. (Subscribers can get access to the class here. If you're not a subscriber, a guest pass will get you full access.)

2. The second-largest threat to your returns is bears. That's right: These furry, man-eating miscreants are everywhere. Unfortunately, that's not the type of bear I'm talking about. I'm talking about bearish investors who tend to short-sell (i.e., bet against) even dividend-paying stocks. These brave souls are the worst kind of contrary indicator, because shorts are forced to paythe dividends on the shares they borrow. That means they're willing to take a cash loss because they believe even greater returns will come when the stock craters. And if they're wrong, their losses can be infinite. Are you listening, Alaska Communications Systems (Nasdaq: ALSK  ) and Novastar Financial (NYSE: NFI  ) bulls?

1. And finally, the top threat to income investors today is truthiness. There's simply no bigger threat to your dividend-divined returns than management that eschews fact for blind instinct. Take StarTek (NYSE: SRT  ) , for example. Even though sales and earnings at this outsourcing firm have been on the decline, executives insist on paying a 7.30% dividend the company can't afford. StarTek investors, you're on notice.

The most threatening dividend payers
StarTek is a classic example of what Income Investor chief analyst Mathew Emmert calls a "dividend time bomb" -- a stock with an unsustainable dividend. Last April, Mathew singled out StarTek and seven others in a special report for Income Investor subscribers. One is now bankrupt. Four others have lagged the market's 8.4% return, even after their meaty dividends were reinvested. Ouch.

This week, Mathew published another list of time bombs (available to subscribers), and the clock is already ticking. Want to know which wires to snip? Ask us for a 30-day test drive. You'll get access to the report and to every bit of research Mathew has produced in earning market-beating returns for the last two years.

Good night
Wasteful spending, bears, and truthiness: It's enough to scare the bejeezus out of any dividend hunter. But you needn't live in fear. Dozens of top-notch businesses with generous dividend yields are out there, right now, waiting for you and your portfolio to come calling. Don't leave them longing, America. Good night.

Fool contributor Tim Beyers really does watch The Colbert Report (almost) nightly. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what is in his portfolio by checking Tim's Fool profile. The Motley Fool has an ironclad disclosure policy.


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