Another decent week earning extra money from beer money web sites. I pulled in just over $80 dollars. As I mentioned before, I expect that it will be difficult to maintain this pace over the holidays as things slow down. I do expect to earn enough to reach my goal of purchasing at least one share of a stock per week (especially with PSEC being so inexpensive*), but I don’t know if I’ll hit $50 dollars a week during the last week or two in December and the first couple weeks in January.
*Of course, purchasing only PSEC once a week would not be a fast way to reach $100 dollars a month in dividend income at all.
I also want to reiterate that while I am aiming for $100 dollars a month in dividend income as quickly as possible, I am attempting to find equities and index funds that are sustainable. However, my positions are still what I would consider to be very speculative. Once I hit my goal my strategy may change to maintain capital, but right now this is all extra income and so I’m okay with losing all of it.
With that I want to touch on the subject of yield traps. What is a yield trap? A yield trap is a situation in which an investment that appears to have a high yield is actually not a good investment. In the case of dividends a yield trap is a company that offers a high dividend yield but has financial difficulties that make it unable to continue paying out that dividend.
One of the best examples of a yield trap was Enron. In the 1990s, Enron was one of the largest companies in the world, with a market capitalization of over $60 billion. It was known for its high dividend yield, which attracted many investors. However, in 2001 it was discovered that Enron had been engaging in fraudulent accounting practices, and the company went bankrupt. This resulted in a huge loss for investors who had been attracted to the company’s high dividend yield.
I want long term, sustainable dividends so I can continue earning a monthly income. I mentioned last week that SLG cut their dividend. I don’t think SLG is a yield trap, especially because it is a REIT and required to distribute a certain percentage of their income, but conventional wisdom says that a high dividend yield could mean trouble.
There are a few key factors to consider when evaluating the sustainability of a dividend. Here are a few things to look at:
- The company’s overall financial health: A company that is financially strong is more likely to be able to continue paying its dividends. Look at its balance sheet, cash flow, and income statement to get a sense of its financial health.
- The company’s payout ratio: The payout ratio is the percentage of a company’s earnings that are paid out as dividends. A high payout ratio may indicate that a company is paying out more in dividends than it can afford, which could be a sign that the dividend is not sustainable.
- The company’s industry and competitors: It’s also important to consider the company’s industry and how it compares to its competitors. A company that operates in a stable and growing industry is more likely to be able to continue paying its dividends.
- The company’s future prospects: Finally, it’s important to look at the company’s future prospects. Is the company positioned for growth? Are there any potential headwinds that could affect its ability to pay dividends?