Shopping for yield when interest rates are at rock bottom levels can attract an investor to low-priced stocks that may not be the best prospects. A recent Barron’s article cautioned investors that high-yielding stocks could be “value traps”. Analysts at Evercore’s ISI Team (a research arm of Evercore Partners, an investment bank and money manager) explain, “Dividend yield as a factor for stock selection [must] be combined with other factors.”
These other factors include payout ratios (percentage of earnings paid out as dividends) and dividend growth. Specifically, the team looks for stocks with low payout ratios because it allows breathing room to increase dividends down the road (whereas a company with a high payout ratio could having difficulty doing so).
Using these criteria, the Eversource team came up with the following mid-cap stock portfolio (which includes a variety of sectors).