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Since the great financial crisis in 2008, investors have had a hard time finding investments that throw off income. The benchmark Treasury 10-year note offers a stingy 1.81%. Forget about keeping your cash in the bank – that's even worse.
That has investors turning to high-yield dividend stocks to make up for their lost income.
But not all dividend stocks are created equal.
Today we'll show you have to avoid common traps and find stocks that pay regular, stable dividends.
We'll also show you one of the best dividend stocks on the market right now.
In fact, in addition to its high yield, it's our top-rated energy stock right now. Thanks to rising oil prices, you could get double the average S&P 500 yield and a 41% upside…
How to Find the Right High-Yield Dividend Stock
In the search for yield, some investors throw caution to the wind and buy low-quality investments like junk bonds. Sure, the yield is higher, but so is the risk the companies behind them will default, leaving you with nothing but a write-off for your taxes.
Even though overall levels of interest rates remain quite low, you can still find investments that offer income yields of 3% or more without taking on too much risk. And if you look in the stock market, you can get this yield and the potential for capital gains too.
Of course, you still have to do a little homework. You'll see some stocks offering dividend yields of 10% or more, and they sure look enticing. But remember, not all big yields are the same.
The yield you get is based on both the income you receive and the price you pay. If the price of the stock drops sharply, your yield will go up. It could be a sign investors are fleeing a sinking ship.
That's why these giant yields are often too good to be true. Sometimes it isn't long before the company cuts back and slashes its dividend, possibly down to nothing.
After all, most companies pay their dividends from earnings, not savings. Theoretically, a company with a strong track record of earnings is making good money and should be able to survive periodic economic downturns.
What you want is a stock that has a reasonably attractive yield and a solid company behind it. You'll want to see if the company has regularly raised its dividend and has the earnings to keep paying it. A simple way to check that is to look at the payout ratio. It's simply the dividend per share divided by earnings per share, and you can find this data for free right here in Money Morning.
As long as your company earns more than it pays, the dividend should be safe. A good ratio is about 60% or below.