stocks can be terrific investments that provide income and growth potential, however, investors must be careful to avoid "dividend traps" -- stocks that offer
enticing high yields, but lack the fundamentals to maintain their rich dividend. These companies are at risk of dividend cuts or even ending payments altogether. But when investors can find high-yielding stocks with the fundamentals to sustain -- and even grow -- their dividends, it can be one of the safest, most reliable ways to grow wealth over time.
With this in mind, I've found two dividend traps I think investors should avoid and two stocks for safe, high dividends.
High-Yielder to Avoid #1: Nokia (NYSE: NOK)
Dividend Yield: 10%
Nokia's 10% dividend may be tempting, but investors should avoid this stock for many reasons.
For example, this mobile phone manufacturer has been consistently out-innovated by Samsung and Apple (Nasdaq: AAPL) and has lost about half of its smartphone market share, which once stood in the neighborhood of 30%. Nokia recently switched its phones to the Microsoft operating system, but that move doesn't much improve outlook. In the last five years, market share for Windows phones has plummeted from 42% to 5%, while Google's (Nasdaq: GOOG) Android and Apple's IOS phones have skyrocketed from 11% to 82%.
Nokia's profits have slid 70% in three years, and sales fell each quarter in 2011, including a 13% drop in the September quarter to $12.35 billion, from $14.2 billion a year ago. Nokia posted a third-quarter net loss of $0.03 per share compared with earnings of $0.20 per share in last year's third quarter.
Nokia's dividend payout exceeds 200% of annual earnings. Nokia has $14 billion, enough cash to cover dividends for now, but is under pressure to increase technology spending, leaving less for dividends.
Nokia's share price is down 50% in the past 12 months, and short sellers hold 25% of the stock, signaling the slide may continue.