Blue-chip bellwether General Electric
Income investors know that chasing the highest yield often turns out to be a recipe for disaster. The market, after all, is a forward-looking mechanism, and oftentimes, a stock's yield is highest right before a dividend cut -- because the stock price declines in anticipation of the cut, but the dividend is still running at the old rate.
Take, for example, Bank of America
Get this: Bank of America's stock traded as low as $2.53 last month -- less than its annual payout as of October 2008! As the examples of GE and Bank of America show, simply chasing high yields can turn out to be a complete disaster.
A different kind of bank
Wells' dividend yield is now about 11%, but in mid-February, when the stock hit a low of $8.81, Wells was yielding 15.4%. Yet while it looked like another Bank of America situation for a few brief moments, I think Wells is in a much stronger position now.
Warren Buffett, who owned 290 million shares of the stock as of Dec. 31, apparently isn't selling. Wells Fargo is increasing lending and taking away market share as capital-constrained rivals pull back from the market. In the end, Wells Fargo may turn out to be the biggest winner of this banking crisis by literally getting Wachovia for free -- thanks to a juicy tax write-off. As scary as the decline looks, Wells does not appear to be another B of A.
The Baltic Dry Index, which measures shipping rates, plummeted 92% in the second half of 2008. If you are a ship operator that works on spot market rates, 92% of your revenues disappeared in six months. Would you venture to guess if those spot ship operators are generating profits or losses?
But there's a smarter type of a shipping operator -- Teekay LNG Partners
At the speed of light
You've probably heard it before: Landlines are a dying business and there is no future in telecom stocks. Yet, some telecom companies keep reinventing themselves. One such survivor is Verizon
When looking for income investments, remember that the highest dividends are not necessarily sustainable. You have to do more homework than just chasing a high yield. The stocks above are a good place to start.
More on dividend plays: