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High Dividend Yield– Too Good to be True?

Recently received a great question from a reader about a stock with a high dividend yield.

high dividend yield

Knowing my love of dividends, the answer may surprise you…

“Long time no talk, hope all is well. I’ve been really getting the topic of dividend yield today, and I’m contacting you because I know it’s a favorite topic of yours.

I stumbled upon a company that has a rather large dividend yield, $CGA, of 19%. It currently estimated to be undervalued by 370%. Although, at a current price of $2.10, that could be concerning. It has a jitta score of 3.79, which indicates that it’s not a “wonderful” company.

My question:

Could one really gain from a company like this strictly by investing in it to reap benefits from the dividend yield? At 19%, that might be something to consider, no? The only downside would be if the company decided to decrease its dividend yield and of course it would naturally decrease a bit if the price went up as well.”

If something looks too good to be true, it usually is.

Especially when you see a yield above 10%… it starts to really raise some red flags.

I looked a little bit into the company. It’s based in China, and the market capitalization is under $2 billion, both of which worry me.

When you read the annual report, they state that their earnings are highly dependent on the Chinese government. Regardless of how you feel about the politics behind that, it means putting a lot of faith in a communist government. 

Secondly, the dividend yield quoted on FINVIZ is wrong. This is just another proof why FINVIZ is only a starting point, and why you want to go to the source with your information. The number on FINVIZ assumes that the quarterly dividend declared will be paid out 4 times, as is the usual case.

However, with this company, they haven’t declared another quarterly dividend even though months have gone by. So you won’t be getting 19% yield.

Then when you look inside the financials again, it clearly states that the company has no intentions of paying a dividend. Even though they did actually declare one, management is either clearly telling you outright to not expect a dividend or they are mixing signals. It’s not dependable any way you slice it.

There’s a lot of possible downside with any investment. To say that the only downside is a decrease in dividend yield is not true. A company can vanish instantly, especially when traded in the penny stock range.

Plus the regulations in China are not even close to as stringent as here in the United States. Earnings can fall substantially in even one year, especially with a company this small. Also, they are telling you this in the annual report! They are completely at the whims of the Chinese government!

I don’t mean to burst your bubble, but I’d stay far away from this one.

I’d recommend reading my latest blog post about dividend investing, which shows you that some of the most successful dividend payers didn’t have to be bought in risky low market cap environments.