The stock market has been under pressure lately, and many of investors' favorite dividend stocks have fallen significantly from the highs, pushing yields higher in the process. In this Fool Live video clip, recorded on Jan. 20, Fool.com contributors Matt Frankel and Jason Hall answer a listener question about investing in beaten-down dividend stocks.
Matt Frankel: This next one from Retiree is actually a really good one, "Are high-dividend REITs good buys in down markets?" Yes, with a big asterisk on it. There are REITs that are cheap then there are REITs that are cheap for a reason. In down markets, it's especially easy to fall into what are called dividend traps or yield traps. We saw a lot of these in the mall REIT space in the original COVID crash, where some of these mall REITs fell and were paying 15%, 16%, and then a three months later were bankrupt.
Jason Hall: But they weren't going to be paying 15% or 16%.
Frankel: Yeah. A few months later were bankrupt.
Hall: Or they had to cut their dividend and now there's material weakness in their business and it may never fully recover where you expect it to be when you were buying.
Frankel: Right. If a stock is just cheap, like nothing has fundamentally changed with its business, like EPR that I just mentioned, where the business is still stable, the dividend is well covered, the balance sheet looks great, then they are great stocks to buy in down markets, especially if you have some extra dry powder in your retirement accounts, which is where REITs make the most sense by far. It could be a great time to buy, but be careful, make sure a dividend is sustainable. Make sure a company is still in good financial shape.
Hall: I think the key to me with these is if you're investing for income today, you're going to take those quarterly or monthly dividends and you're going to spend them to pay for your life, then you have to be especially careful. But if you're buying it because of the income it's going to pay you and to build you wealth in five, 10, 20 years, then you can sometimes be a little more speculative. You can buy one that you think, well, they may have to cut the dividend because of a temporary problem. It's a good business with a temporary problem, and then they're going to emerge from that, and they should be strong, and you're going to be well compensated with bigger dividends down the road and the share price is going to go up. So, think about where you are in your investing cycle, too.
