Dividend-chasing is in vogue. Given low interest rates, many investors say they have no other choice.
Such thinking leads to costly mistakes. It just badly hurt those who had bought shares of Teva Pharmaceutical Industries TEVA, because of its high dividend yield.
This isn’t just an issue for Teva investors, of course. There are many companies whose share price is being held up by dividend chasers. Take what happened in this case, however, as a reminder to review your portfolio and then sell those dividend-paying stocks where underlying businesses are deteriorating.
In the case of Teva, the warning signs were certainly there, but investors who were focused on the dividend missed them. Click here to see an annotated chart. The chart also shows the points when the “smart money” was selling into the strength generated by dividend chasers.
On the surface, the dividend yield looked attractive. Not only did the company pay a good dividend, but it was passing other screens that many investors use. These include the longevity of the dividend, dividend growth and the payout ratio, which is the share of net income that is paid in dividends. The chart shows the point when the dividend yield reached 4.5%.
But all wasn’t well at Teva, which is best known for its generic-drug business but also has a branded (or not generic) drugs unit. Prices on generic drugs have been under pressure, and its main branded drug, Copaxone, was facing patent challenges.
While Teva’s business showed signs of improvement at the end of 2016, that quickly disappeared, and it became clearer that competitors would succeed in a long-running patent battle over Copaxone, a treatment for multiple sclerosis…Read more at MarketWatch
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