4 Indicators of Dividend Stocks to Avoid

Dividend stocks are profitable on two levels: first, they provide short-term income from dividend earnings; second, the provide opportunities for long-term capital gains through appreciation and splits. In exchange for this high chance of profits, you must be able to assume some degree of risk when purchasing a dividend stock. While some risk is necessary, there are indicators that you may be engaging in an investment that is simply not worth the gamble.

#1 Limited High Growth Rate

Limited high growth is a term used to describe a stock that is in the process of a bullish run. This means the stock has seen high growth in a short period of time, leading many investors to feel it is a good purchase. The limited high growth model assumes the stock will not sustain this growth period for more than five years. The model then tries to determine where the stock currently is in this growth period and how much more it can appreciate. If the stock is nearing the end of its limited high growth period, then it is no longer a good investment. In fact, the price of the stock may already be much higher than the value it will sustain in the long-run.

#2 Constant Growth Rate

The constant growth model concentrates on mature stocks that have shown a relatively predictable growth in dividends over an extended period of time. The model assumes the growth rate will remain constant in the foreseeable future. As a result, the model anticipates future growth rates, then adjusts back in time to determine a reasonable price for today. If the reasonable price is higher than the price currently offered, the stock is a good buy. Unfortunately, with many constant growth stocks, the reasonable price is actually lower than the price being offered today. You would be better off purchasing a less mature stock.

#3 Trending Topics

Trends can easily cause or fall victim to speculation, bubbles and crashes. Each year, there seems to be some new emerging market or investment opportunity that attracts investors. You do not have to take part in these trends, and you should not take part in these trends. A good indicator is this: if more than one stock broker not known to you contacts you with the chance to buy into the same opportunity, you may have just spotted a trend. Often, young brokers looking for new clients will lure them in with these trends, and you will need to be discerning in order to avoid them.

#4 High Volatility

High volatility in a stock is often a sign there is a lot of growing yet to do. This can be a good sign; you may have located a value stock that is priced far below other stocks with similar dividend growth. However, you may have also located a stock that will waver in value for a few years before completely losing its worth. High volatility is not necessarily a red flag, but it will alert you to additional risk, and you should factor in this risk to your consideration of the opportunity.

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