A big dividend is enticing, after all what not to like about making more money. But, certain degree of skepticism is warranted when this yield becomes unusually higher in a very short time. Currently, there are certain stocks that fit this criteria, especially in the battered retail sector. The onslaught of online e-commerce on traditional brick and mortar retail is causing some of the retail stocks to plunge to multi year lows, thus pushing up the yields.
Apparently, when a stock plunges, the current dividend yield appears attractive. But, this seemingly higher yield is very likely to be cut, and is not sustainable. Maintaining it could potentially become a drag on the financial health of the business. In this scenario, the overall capital structure has to be taken a closer look to assess the financial health and the continuation of the dividend. I’m just referring to common stock only and nothing else in the capital structure hierarchy. In a way, cutting the dividend is the logical step financially. There were many instances in the past, when the dividend yield was high due to a plummeting stock price, subsequently resulting in a particular business encountering serious problems.
Anything that appears rosy while investing in the financial markets requires some level of caution.