Sucker Yield

Categories: Credit, Bonds

The stock was at $80 a share and was paying a whopping $8 a share in dividends. That's a 10% yield for you AP Calculus snobs.

You didn't do a lot of research behind why this particular stock was yielding 10% when the rest of the world was yielding more like 3%. The market was telling you that it didn't trust the $8 dividend; if it did, that stock would have been trading closer to $200 a share. But you bought the stock for the 10% yield and the $8 dividend...and yes, you were a sucker, taken in by the sucker yield. And everyone laughed at you quietly, when the company announced a massive dividend cut to $3 a share. The stock still traded down a bit, but just to $70, where it was now yielding about 4%...which felt a lot more in line with the rest of the world, everything considered. Sucker yield at work.



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