Dividend stocks are an essential part of retiring with financial security. But many retirees make a very simple and avoidable mistake with their dividend stocks: they choose the highest-yielding stocks available rather than thinking about longer-term prospects for their portfolios.
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at the problems that high-yield dividend stocks can create. He notes that high yields are often unsustainable, with imminent dividend cuts hurting your investments both by cutting your income and suffering share-price declines. Dan gives the example of the Select SPDR Utilities ETF (XLU 0.27%), which has done well this year but could be vulnerable from higher interest rates in the future. Yet Dan also points out that some high-yielding stocks can be promising, discussing the stable cash flow and long-term prospects for telecom giant AT&T (T 0.47%) and cigarette maven Altria Group (MO 0.18%). Dan concludes that you have to look at stocks with consistent track records of rising dividends in order to make the most of your investment income potential.
