Look at Dividends Before Dumping Stock

Recession fears are sending everything down and it may be tempting to liquidate your stock positions.  Please reconsider!

People often forget that there are TWO ways to make money by going long on stocks: capital appreciation (the stock price rises) and dividends (when the company shares earnings).

Even if prices are dropping the dividends may not be.  Search for dividend yields.  A dividend yield equals the company’s annual dividend divided by the price of one share of stock.  The dividend yield changes as the price of one share changes.  So now that prices are moving lower dividend yields are moving higher.

I just ran a simple screener on yahoo for stocks with the following constraints: price between $5 and $50 (below $50 to keep reasonable prices, above $5 to limit excessive risk), dividend yield greater than 25 percent (just to look for nice payouts) and positive return on equity. 

The screener returned 21 stocks, many of which have reduced or eliminated their dividends since the last batch of data was pulled.  Of the remaining stocks I noticed several from the oil tanker sector.  This is in NO WAY an endorsement of any of these stocks! 

Arlington Tankers (ATB) and Frontline (FRO) are oil tanker companies with yields of 24.73 and 44 percent respectively.  Their yields moved much higher today because this sector was downgraded by a few heavyweight analysts. 

This does not mean go out and buy stocks just because the dividend yield is high.  If the company is in trouble it may decide to reduce or eliminate its dividend.  Take a look at the dividend history and determine if the risk and return profile is tolerable for you. 

At a time like this when everything is falling, this is just a reminder: dividends can be used as a cushion against falling stock prices.