Dividend-hungry investors often get lured by the siren song of exceptionally high yields. While a juicy payout seems irresistible, it’s crucial to exercise caution and be wary of the potential pitfalls that lurk beneath the surface. Here’s why I, too, harbor reservations about companies offering excessively high dividend yields:
Unsustainable Promises:
High yields can be a sign of desperation. A company may resort to excessively distributing its profits to attract investors, especially when struggling to grow organically or facing financial difficulties. This practice, however, is unsustainable in the long run. Once the underlying profitability weakens, the company may be forced to cut or even eliminate the dividend altogether, leaving investors high and dry.
Risk of Value Erosion:
A high dividend payout implies less reinvestment in the company’s future. This can lead to stagnation and hinder the company’s ability to innovate, adapt, and compete effectively in the long run. Consequently, the intrinsic value of the stock might suffer, leaving investors with diminishing returns despite the seemingly attractive dividend.
Hidden Liabilities and Debt:
