Cliffs Natural Resources Inc (CLF), Pitney Bowes Inc. (PBI): Dividend Stocks Can Be Downright Dangerous

The rash of special dividends we saw late last year was a particularly good example of this phenomenon. Costco Wholesale Corporation (NASDAQ:COST) chose to make a payout of $7 per share late last year, noting that the company had more than enough cash to cover the dividend. Yet the company ended up borrowing money in order to help finance the payout, tripling its outstanding debt.

Some companies even make their regular dividend payments by raising capital, either from debt offerings or by selling new shares. Utilities PPL Corporation (NYSE:PPL) and The Southern Company (NYSE:SO) have used this strategy for years, as capital-intensive operations often make it necessary for utilities to find sources of cash elsewhere in order to give investors the dividends they’ve come to rely on.

Beware of dividends
Of course, thousands of dividend-paying stocks are perfectly good investments, so suggesting that all dividend stocks are dangerous is a gross exaggeration. But before you assume that any dividend stock is automatically healthy, you need to be aware of these potential pitfalls that can trap unwary dividend investors.

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The article Dividend Stocks Can Be Downright Dangerous originally appeared on Fool.com is written by Dan Caplinger.

Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale (NASDAQ:COST) and Southern. The Motley Fool owns shares of Costco Wholesale.

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