The Seven Sins of High-Yield Investing

Sin #6: Getting Paid in Special Dividends

A common method for paying dividends from funds that invest outside the U.S. is to pay “special dividends” composed of short-
and long-term capital gains. The dividend policies of such funds are predicated on the ability of the fund manger to pay out whatever
gains can be garnered over the course of a year depending on short or long-term holding periods.

Closed-end funds based on China, India and other emerging markets had explosive returns from 2003–2007, chalking up 50%+
returns. But a large portion of those returns where paid out in the form of huge capital gains-based dividends and are reflected
in most screening software portals that suggest these funds are still paying out these gorilla-sized dividend yields.

They’re not, and the data can be hugely misleading when investors are hunting for big yields through various screening tools.
Needless to say, in a bear market like the past eighteen months, these once-hot funds won’t pay out a dime because they aren’t
making any money, making the dividend yields zero.

Bottom line is that these types of funds shouldn’t be considered income vehicles in the first place.

NEXT: Sin #7: Buying Domestic Energy Trusts