Don't Ignore the Dangerous Side of Dividend Stocks

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Pitney Bowes
Pitney Bowes / Facebook
With low interest rates having eliminated any chance of earning a decent income from bank CDs and other safe investments, millions of conservative investors have turned to dividend stocks. That would seem like a logical move.

Yet in moving more of their money into the stock market, investors often forget that dividend stocks are a lot more dangerous than fixed-income investments -- and owning the wrong dividend stocks can end up burning you twice.

Just When You Thought You Were Safe

Pitney Bowes (PBI) gives us a textbook example to illustrate the dangers.

When it comes to solid dividend stocks, Pitney Bowes looked incredibly attractive to many investors. The stock sported a sky-high dividend yield of nearly 10 percent, and even more importantly, Pitney Bowes had demonstrated its commitment to increasing its dividend payouts over time, with a 30-year track record of boosting its dividends on an annual basis.

Yet that track record didn't stop the company from slashing its dividend in half after it announced its most recent quarterly earnings. Citing the need for "add financial flexibility to invest in its business and enhance its capital structure," the company will now pay $0.1875 per share on a quarterly basis, beginning with its June payment.

As if the news that half of their income would disappear weren't bad enough for investors, Pitney Bowes' shares immediately plunged after the market opened following the announcement. Within hours, shareholders had lost more than 16 percent on their investment.

Warning Signs

Attentive investors saw signs of potential trouble long before Pitney Bowes' announcement.

The stock was removed from the prestigious Dividend Aristocrats list because of the drop in its market capitalization, which took away one of the company's biggest incentives to keep raising its dividend. Moreover, the company had started diverting cash toward paying down debt, reducing the amount available for dividend payments.

Perhaps most importantly, Pitney Bowes had skipped its usual token dividend increase earlier in the year, signaling a change in its payout policy.

Despite those signs, the stock's rapid plunge shows how surprised most investors were by the move. Dividend cuts usually create strong downward pressure on a stock's price, and that leaves the conservative investors who gravitate to dividend stocks facing an unpalatable combination of big principal losses and reduced income going forward.

Know What You're Getting Into

Bank CDs are largely buy-and-forget investments, which you can let sit until they mature. Dividend stocks, on the other hand, require regular attention, and even then, unexpected pitfalls will occasionally wreak havoc on your portfolio.

Remember that before you move too much of your money into dividend stocks in search of better returns.

Motley Fool contributor and The Motley Fool have no position in any of the stocks mentioned. For long-term investing ideas, check out our free special report, "The 3 Dow Stocks Dividend Investors Need."

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7 Comments

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kluj1

May I add that bank CDs USED TO BE buy and forget. Now you don't know which bank could go out when you wake up. Spare me the FDIC insurance stuff. False sense of security.

Check out treasurydirect.com.

Sit in cash or purchase treasures direct backed by the full faith and credit of the USA. Sure, that may not sound good considering the condition the country is in yet its the last line of defense and better than FDIC and I'm not sure i want my money in so e other country right now cause they are dropping like flies. If the USA goes down the. I have a feeling you will need a gun more than money.

May 01 2013 at 9:17 PM Report abuse rate up rate down Reply
ltc572805

Additionally, if you own a portfolio/mutual fund of dividend paying stocks and reinvest the dividends - If the stock price goes up, you benefit from the gain. If the stock price goes down, you get more shares. The Pitney Bowes example is an outlier, an aberration. With few exceptions, contrary to what some believe (or certain brokers want you to believe) stocks should be looked at as a long term investment.

May 01 2013 at 12:51 PM Report abuse -1 rate up rate down Reply
dubricus

Is there anything informative here? If one wants to stick money in a CD, at this point in time, one might as well put it in the mattress. My question is: Is this article intended to sell CDs? As for divs... anyone is looking for some return, actually seeks dividend stocks and invests either online or through a broker, probably knows that when the div is cut, the stock price drops. However, $.18/share div is not exactly a bad return unless the stock price is quite high. By cutting the div and taking that share price hit, Pitney-Bowles actually made a reasonable business decision.... and if you've not gotten out already, it might be smarter to stay. However, if you did get out, now might be the time to buy.

May 01 2013 at 12:36 PM Report abuse rate up rate down Reply
pfjw

Lemme see....

Stocks go up. Stocks go down.

Companies evolve, companies change.

This is news because?

May 01 2013 at 12:03 PM Report abuse rate up rate down Reply
davefromfwb1

Anything is still better than having your money sit in a bank account. Besides if your buying dividend stocks it's better to hold onto them for the long term. I had bought CTL about 2 years ago and this exact same thing happened to them. They slashed the dividend almost in half and then the stock went down....it's gone back up within 3 months now and I'm doing good. The stock market is now back into the buy and hold...for a long time and you'll definately come out ahead. ALSO....buy multiple companies within different sectors and you'll not lose everything all in one stock...I got greedy back in the tech bubble days and lost everything on one stock....never again will I do that.

May 01 2013 at 10:37 AM Report abuse rate up rate down Reply
ltc572805

That's why you own a portfolio of dividend paying stocks. "Don't put your eggs in one basket." Sound familiar?

May 01 2013 at 9:46 AM Report abuse +1 rate up rate down Reply
eberinn

THANKS FOR THE HELPFUL INFO

May 01 2013 at 8:36 AM Report abuse rate up rate down Reply