Don't Make These Really Basic Mistakes

Attractive stocks with low prices and high dividend yields: Who wouldn't like that? In my travels of the Web, I recently found a list that supposedly compiled several such stocks. But that list is problematic for two big reasons.

Define "low"
First, in the world of stocks, a "low price" isn't what a newcomer might think it is. Yes, a $5 stock has a lower price than a $25 stock. But it's not five times more attractive. It might not be attractive at all. What really matters is a stock's true, intrinsic value -- and how its current price looks compared to that. The $5 stock might really be worth $1.20 per share, while the $25 stock might be worth $40, making it a bargain. Remember that $50 stocks can -- and often do -- become $100 stocks, while $5 stocks can -- and often do -- fall to $0.50 or below.

Check out these stocks with seemingly high prices. Each draws very favorable opinions from the folks in our Motley Fool CAPS community, earning five of five stars:

Data: Motley Fool CAPS.

Meanwhile, here are some one-star companies (out of five stars, remember), with prices that might look good to a neophyte investor:

Data: Motley Fool CAPS.

Dividends within reason
Second, high dividend yields are terrific -- but only in theory. Who wouldn't want an investment that will give you double-digit percentage payouts each year? Unfortunately such steep yields are not usually sustainable. Companies often sport a lofty yields only because they're in trouble, their stock has crashed, and they have not yet reduced or eliminated their dividends.

Look at General Electric (NYSE:GE). In early January of this year, its stock was trading around $12 per share, and paying out $1.24 in annual dividends, for a yield of around 10.3%. A month later, the dividend had been cut to $0.40, and the stock was around $8, reducing the yield to 5% at the time.

The trick is to look for companies with solid and sustainable dividends -- dividends that let you sleep well at night. Maybe even dividends you can enjoy for 100 years.

These lessons may seem simple, but beginning investors often get tripped up on them. Don't assume that low-priced stocks are "cheaper" than ones with high share prices, and don't automatically buy the highest-yielding stock. If you avoid those basic mistakes, you'll already have a big leg up on many investors.