Double-digit dividend yields look awesome on your quarterly account statements. A rich stream of pure cash rolls in like clockwork, building your cash reserves or buying more shares right away via DRIP plans. It's wealth-building magic.
Unfortunately, not all megayields are created equal.
Some big dividends flow out of genuinely generous payout policies, often boosted time and time again over decades of steady sharing. That's the good kind -- the type you hope to pass down to the grandkids some day.
But some yields only look rich because the underlying stocks have become desperately cheap. This is the scary kind of high-yield situation. Some of these extreme price discounts with fantastic dividend yields stem from short-term misunderstandings, but some stocks are cheap for good reason.
Chasing extreme dividend yields is risky business. Check out this basket of leading dividend-payers and see how their dividend-boosted total returns have compared to the Dow Jones Industrial Average (DJINDICES:^DJI) over the last five years:
As you can see, only regional telecom Windstream (NASDAQ:WIN) has kept pace with the Dow in recent years. Cellcom Israel (NYSE:CEL) and Windstream went public less than 10 years ago, but the megayield warnings still apply to the other two stocks on a longer time scale:
In particular, fellow Fool Rich Duprey worries that Cellcom Israel's meaty 11% dividend might not be sustainable. The stock is plunging on low-cost competition in the home market, much like France Telecom (NYSE:ORAN) shares suffered from an onslaught of new rivals in the French market. Both companies have indeed slashed their payouts to manage their cash flows.
I don't mean to tell you that all double-digit dividends are meaningless, but you do have to take a deep dive into business fundamentals before buying into the dividend story.
The Motley Fool owns shares of France Telecom. Motley Fool newsletter services have recommended buying shares of France Telecom. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.