Market Wrap-Up for Aug. 21 (LOW, TGT, AEO, SJM, more)
U.S. stocks got off to a rocky start once again today, as Wall Street was bracing for the FOMC minutes release later in the afternoon. Forgive me if this sounds like a broken record, but investors and traders were anticipating that the minutes would show that the Federal Reserve is committed to slowing down its monetary stimulus next month. However, as was somewhat expected, the Fed did not give any real hints about the future of the easy money spigot. As such, we got a bit of volatile trading late in the afternoon, with the major indices eventually finishing in the red.
Monetary policy expectations weren’t the only thing influencing the tepid sentiment on the Street today. Underwhelming earnings releases and outlooks from J.M. Smucker (SJM), Staples (SPLS), Target (TGT), American Eagle (AEO), PetSmart (PETM), and Analog Devices (ADI) dragged those stocks into negative territory.
The lone bright spot among companies to report earnings today was Lowe’s Companies (LOW). The home improvement retailer’s shares finished up about 4% after it beat on the top and bottom lines. As for Wall Street analysts’ upgrades and downgrades, shares of Garmin Ltd (GRMN), Royal Caribbean Cruises (RCL), and Questcor Pharmaceuticals (QCOR) rallied following positive analyst moves, while Tupperware (TUP) shares declined following a downgrade.
Be sure to check the Dividend Daily for all the latest earnings reports, analyst moves, and much more.
Beware of Misleading Yields
This morning while assessing American Eagle’s (AEO) second quarter earnings report, I noticed that the stock is now yielding over 3%. With the stock plummeting in trading today, that yield only got larger. On the surface, a 3%-plus yield might seem attractive to an income investor, especially in our low interest rate environment, but investors need to remember that there are other factors at play when assessing potential dividend investments. You cannot take the yield at face value.
For instance, American Eagle may seem to have an attractive dividend yield, but realize that this is only because the stock is down about 27% year-to-date, compared to the S&P 500′s +15% year-to-date performance. A plummeting stock price will always make a dividend yield look more attractive. But falling for yield, while ignoring the stock’s actual share price performance, may result in investors getting trapped in a long-term losing stock with the possibility of dividend cuts in the future, which is the opposite of a dividend investor’s presumed goals.
Furthermore, investors need to take other factors into account before making long-term dividend investment decisions, including earnings growth, payout ratios, and a history of dividend increases. You want to ensure that your dividend investments will perform well into the future as you attempt to build wealth. Initiating positions in stocks with limited upside and unsustainable dividends just because they offer an attractive yield at the moment will just make your long-term investing goals that much harder.
Thanks for reading. Be sure to check us out on Twitter @dividenddotcom. We will see you tomorrow!
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