As the market tanks, the list of “Accidental High Yielders” grows. How about a $3.5 stock with a 23% yield and insider buying?

When the equities in your portfolio plummet, you may find yourself asking: What are these stocks really worth? They’ve fallen ten or twenty percent – what’s to keep them from declining even further? Well here’s one thing that can anchor a portfolio: Sizeable dividend payments.

In the current market selloff, the number of “accidental high yielders” is growing. An accidental high yielder is a stock that pays a high dividend yield, but not because the company necessarily intended for the shares to be a high yielder. Extreme selling by panicked investors has driven the stock lower even though dividend payments remain the same. With accidental high yielders, the stock price has cratered, but the payout is unchanged.

Accidental high yielders may be great investments for several reasons: One, the dividend cash flow is nice to have while you wait out the bear market. Two, as mentioned, the high dividend can act as a cushion to keep a stock from falling too low. And three, accidental high yielder stocks might be exceptional values –shares where selling has been irrational and excessive. In the future you could get a double-barreled return – high dividend payments and price appreciation as the market gets rational and share prices normalize.

Now of course there is a big risk with high-yielding stocks in general and accidental high yielders in particular: The dividend might get cut. In fact, a stock’s high yield may reflect market expectations that a stock’s dividend is not secure. You don’t want to buy a stock for its fat dividend and then see the dividend get thin, or even eliminated.

But what if insiders have been buying the accidental high yielders? C-level executives, directors and large shareholders of a company know their own businesses better than anyone. If a company were going to cut its dividend, would a corporate insider be buying that stock? Probably not. Insiders typically don’t buy their own shares if a negative corporate development is imminent. They do buy their own stock if they think it’s a bargain.

The table below contains stocks with dividend yields over 6%, based on the last year’s dividend payments. But to make the list, a stock also have had insider buying over the last quarter of at least $100,000.

Now a word of warning – do your homework on these stocks. Things to investigate: How long have dividends been paid? Have they been increasing or declining? Is the dividend yield overstated by a recent one-off payments? Does the company have a large debt burden? Have earnings suddenly turned negative? Are all earnings paid out as dividends with small retention rates? Is it an oil company that will be forced to cut dividends to reflect lower oil prices?

Insider buying does not guarantee that a dividend won’t be cut, or that a share price will hold up in the bear market. Sure, insiders have been buying – a great sign – but that doesn’t guarantee that a dividend won’t be cut or that a stock’s price won’t go lower in a bad market. Caveat emptor!

Source: WhaleWisdom and Interactive Brokers

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the article