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Every month, the big financial outlets love to post quick, simple write ups of the top dividend yields you can buy that month. It's an easy story that takes just a few minutes to throw together.
And since there are roughly 3,000 stocks that pay dividends, these lists make it easy for investors to pick a handful of impressive dividend payers to add to their holdings... I mean, who has time to cull through thousands of stocks every month?
Unfortunately... dividend yields can be extremely misleading.
And the highest dividend payout isn't always the best way to get the highest return for your dollar.
But I have three rules that can help you cut through the reporting BS and pinpoint the best dividend stocks that you actually want in your portfolio. Let's look at some real-time examples, and I'll show you what I mean.
Here's a list of the top 10 dividend yields available.
These yields look incredible... almost crazy! The highest one by far is Renren (RENN), which has a 2,500% forward dividend yield. Can you imagine? I'd bet most folks who saw that yield would say, "Wow!"
But when I saw that number, it made the hair on the back of my neck stand up...
That's because it's literally impossible to receive more dividend in a year than the stock price is worth.
I decided to dive deeper.
A quick glance at RENN's price chart was all I needed to solve this puzzle. Back in December, when the last dividend payment was announced, the stock was trading around $34 a share. But today, the stock is trading around $1.26. With a little investigative work, I was able to find that this is kind of a corrupt company, and the large dividend payout in December was the result of a legal settlement to shareholders.
But even without knowing all that, the stock's price drop alone tells me there has been a massive change at the company, one that will certainly affect its ability to pay a dividend in the future.
Here's the rub: Despite the fact that there's obviously been this HUGE change in the company's price - and likely, the company's future dividend payout - the reporting system won't update until the next dividend is announced. As a result, it makes RENN's dividend yield look astronomical.
But it's not real.
So, let's go back to the chart. Just a quick glance at the forward dividend yield tells me these are all probably bad. When you see a dividend yield in the high double digits, it could be anything from a reporting error to a reverse stock split where the dividends haven't been updated or maybe even a bad number (like that RENN example), and it could take as long as a quarter - or even up to a year! - before it corrects itself.
Rule No. 1: When it comes to looking for dividends, don't believe what you see.
In the video below, I'…
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About the Author
Tom Gentile, options trading specialist for Money Map Press, is widely known as America's No. 1 Pattern Trader thanks to his nearly 30 years of experience spotting lucrative patterns in options trading. Tom has taught over 300,000 traders his option trading secrets in a variety of settings, including seminars and workshops. He's also a bestselling author of eight books and training courses.