As I type these words, I'm looking at a stock with a dividend yield of 19.6%. Amazing, eh? I'm exhaling deeply, too, because I noticed the stock just a few months ago, when it sported a still-eye-popping yield of around 12%. At the time, I was tempted to snap up some shares. Just think of it, I told myself. If I invest $5,000, I'll get $600 in dividends each year, and dividend amounts tend to rise over time. Perhaps in a few years, I'll be receiving $1,000 per year!
The big picture
It's important, though, to rein in our urges to buy impulsively, until we've done a good bit of research into a company. After all, stocks that have fallen to seemingly attractive levels may have fallen for good reason. I'm glad I didn't buy the company in question -- CapitalSource
Let's see what I might have found, had I researched CapitalSource a little. For starters, it's a commercial lender, and its return on assets has been falling over the past few years, as has its return on equity. Its debt level has increased substantially, too. Its five-year average dividend yield is 6%, so the recent steep levels reveal how far the stock has fallen (remember that as a stock falls, its yield rises, as long as the dividend amount holds steady).
I learned a lot by checking out the thoughtful commentaries on the company at our Motley Fool CAPS stock-rating community. For example, the company is a REIT (real estate investment trust), so it must pay out at least 90% of its income in dividends. That can limit its options.
Still, many good investors believe in CapitalSource. Fully 96% of our CAPS All-Stars who rated the stock expect it to outperform the market. Even our Motley Fool Income Investor analysts like it, although they call it a "high-risk, high-potential reward situation." I think I'd rather look for hefty yields elsewhere -- although I know they won't be 20%.
If you're looking for yield, too, I invite you to test-drive, for free, our Motley Fool Income Investor newsletter. (It sports more than 20 recommendations with dividend yields topping 6%!)
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. CapitalSource is a Motley Fool Income Investor recommendation. Washington Mutual is a former pick of the newsletter. The Motley Fool is Fools writing for Fools.