Dividend Stocks: Something Important To Watch For

We cover dividend stocks quite a bit here at The Juice. 

Most recently:

What Are Dividend Growth Stocks With Examples?

Top 5 Dividend ETF Searches By Financial Pros

AI Growth Stock With A Solid Dividend?

At each of those links, there’s a nice mix of actionable insights and educational information for investors of all levels. This is what we pride ourselves on at The Juice. Creating content that can help make a wide range of people better with the money they spend and, if there’s some left over, save and invest. 

Today, we continue with the investing part. And dividends. 

We like to revisit dividend-related caveats from time to time. For example, in Dividends Are Only Part Of A Retirement Income Strategy, we showed how it’s actually pretty tough to generate dividend income to live off of, using stock market laggard Starbucks (SBUX) as an example:

Plus, SBUX yields nearly 3% and has a 14-year track record of increasing its now $2.28 annual dividend. 

You would need a $500,000 position in SBUX to generate $15,000 in annual dividend income. For a million reasons this approach makes little sense. If nothing else, you can get more for your money using the CD approach. Or you can lighten your risk, spread your money across equities, including some with better performing stock prices. So you collect some income, maybe reinvest some and watch your principal grow in the process. 

For most of us, dividends will be a way to build our positions and maybe generate a small bit of supplemental income. If you’re lucky enough to have some regular money coming in (work, Social Security, a rental property), interest in high-yield savings (we’ll see for how long savings rates stay this high) and you can generate a few hundred to a few thousand a year via dividend stocks, you’re sitting pretty. 

A 3% yield! C’mon. You can crush that in a savings account or certificate of deposit these days. 

This might tempt you to fall for stocks that have a higher dividend yield. One that beats what you can presently earn on your cash. We suggest you pause prior to giving into this temptation and consider the ins and outs of dividend yield. 

Dividend yield shows how much a company pays out in dividends relative to its stock price (dividend divided by stock price, multiplied by 100 to get a percentage). 

For instance, if a stock trades for $50 and pays a $2 annual dividend, its dividend yield is 4%. 

• Dividend yield is dynamic. As a stock’s price or (less frequently) annual dividend fluctuates, so does dividend yield. 
• A high dividend yield isn’t necessarily a good thing. In fact, it’s often a red flag. 
• There tends to be a sweet spot for dividend yield, particularly when it’s among other important factors.

Key points to remember. 

When we ask our Trackstar to scan the platforms of our 100+ financial media partners and show us the dividend stocks investors search for most, Apple (AAPL) almost always tops the list. Of course, Nvidia (NVDA) has become the Trackstar powerhouse, but, as dividends go, you really can’t compare NVDA’s measly payout with Apple’s relatively strong one. 

Apple currently pays an annual dividend of $1.00. It’s increased its dividend payment every year for the last 13 years. Expect the company to announce another increase with earnings early in 2025. 

At the same time, Apple yields about 0.45%. We made this calculation with the stock trading for $224.31. As Apple’s stock price fluctuates, so will its dividend yield. Holding the annual dividend constant, as the share price decreases, dividend yield increases. The inverse holds true.

This isn’t a particularly impressive yield, but Apple stock is up 20% YTD and should continue to increase its dividend annually. As the dividend keeps getting more formidable, you’re also seeing stock price appreciation. 

Taking it a step further, “measly” NVDA yields just 0.03%. However, the stock is up around 145% YTD. We won’t insult your intelligence with further explanation. The relationship between a dividend and its yield and seeing your position grow thanks to stock price appreciation is clear. 

This said, some investors don’t want to be in stocks such as AAPL and NVDA. They’ll trade company growth and share price appreciation (or at least a little bit of these things) for a larger dividend and higher yield. All good, as long as you don’t fall into a yield trap. While SBUX isn’t necessarily a yield trap, it is a case of dividend income doing (most likely) being unable to offset a weak stock price. 

You have to stop and think why would you collect a few bucks a quarter as a stock price falls? 

To further illustrate this, consider AT&T (T), what we can call, historically, a classic yield trap. 

While they have been on the rebound lately (up 30% over the last year), over the last five years, AT&T shares have lost roughly 23% of their value. And during that time, the stock’s dividend yield was as high as 7.9%, but never lower than 4.0% and change. At about $19.00 per share (close to its 52-week high), the stock yields roughly 5.8%. 

On 100 shares of T – a $1,900 value – you’d get roughly $110 in annual dividend income, based on its $1.11 annual dividend. 

Sounds incredible until you factor in what’s happened with the share price.

Historically, the longer you stuck it out with AT&T, the less of a contribution the dividend made to your overall investment. Let’s say you bought T near the $30 top in late 2019. On 100 shares, you’d be down about $1,100 on your investment. 

The dividend income you would have collected (and the cut you would have endured) doesn’t come close to offsetting your losses (on-paper or otherwise) in the stock, aside from the dividend. 

The Bottom Line: AT&T is an example of a classic yield trap. While this might change going forward, we would advise buying a stock such as T, yielding nearly 6%, only if you really, really, really, really believe in the business and expect the stock price to keep climbing. We don’t have a ton of faith in this projection. 

We feel a lot more comfortable in NVDA or even AAPL and, maybe better yet, easily-accessible cash earning 5% or so (for as long as we can get that rate) than in a lame stock that yields close to 6% simply because of a depressed stock price.

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