Diary of a Dividend Diva: A Valu-able Lesson

The Supervalu (VLU) blow-up teaches an important lesson about dividends in general, as Jim Cramer has pointed out -- but it also highlights important tenets for our readers doing dividend-capture trades. Probably the most important element of dividend captures is choosing stocks with the right yield. For stocks with a tiny payout, your volume of trades needs to be unnaturally high in order for you to accumulate a satisfactory level of income. The temptation is thus to go for the highest yielding stocks. Capturing a 2% payout in a single trade, or even 3% or 4%, can entice even the most disciplined trader.

The problem with ultra-high yields is that it's signaling significant risk in the stock. Supervalu was at nearly a 9% yield when it paid its last dividend in June, far above its negative same-store sales. That high yield was indicating material risk. In similar fashion, to the consternation of some of my partners and readers, I have never played Annaly Mortgage (NLY), which has a 13% yield. It may or may not blow up, but I don't really understand its model well enough to take the risk of playing it....252 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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