If you ask CNBC’s Jim Cramer, reaching for a stock’s dividend yield is one of the dumbest mistakes an investor can make.
“If you see a stock sporting a yield that’s well in excess of what you can get elsewhere, I think you should be skeptical,” he said Thursday on “Mad Money.” “Most likely, it’s not a bargain, it’s a sign that the dividend is going to be cut.”
Cramer flagged the cautionary tale of the stock of CenturyLink, an old-school telephone and data service provider which, until recently, had the largest yield in the S&P 500. But on Wednesday, management slashed the dividend from $2.16 a share to $1.00, saying they would focus on creating value in other ways. Shares fell to a new 52-week low.
Referencing his November warning about the stock, Cramer said he saw this coming based on what happened to two other, similar companies whose stocks are now too small for him to mention on air.
“Over the years, their CEOs repeatedly told me that their dividends were safe. But … this part of the telco industry [is] a dinosaur. Their stocks gradually went lower as their revenues shrank, making their yields seem more attractive. Management insisted that the market had it wrong and their dividends were safe,” the “Mad Money” host explained.
But when their stocks went from near $100 a share to the single digits, that turned out to be totally wrong. And while CenturyLink has a better balance sheet, Cramer implored investors to learn a lesson from its cut and do their own homework.
“With CenturyLink, it was obvious to anyone with discipline that the sky-high yield was a red flag, even as many analysts failed to see the cut coming,” he said. “Some things are simply too good to be true, and a stock with an 11.5 percent yield? That’s one of them.”
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