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Beware the Dividend Trap of 4 Stocks Setting Up in Bullish Patterns


If the trend changes and stops are hit, one cannot be stubborn and gain a false sense of security through the dividend. At the end of the day, it's still a trade.

Typically, people will select their interest-bearing securities for all the wrong reasons. I can remember vividly when I wrote a piece talking about how silly it was to be a buyer of Citigroup (C) just because it paid a dividend. It wasn't the piece that was so memorable but the response I got from some very angry readers. One proceeded to tell me that I clearly had a "hidden agenda" and that even if Citigroup "fell another 20% he'd sleep soundly at night knowing his dividend was safe." Well in a way he was right -- my hidden agenda was to protect someone like him from getting clobbered, but I guess he didn't see it that way.

Over the years I've seen many fall into the dividend trap. The stock could be getting annihilated but someone will find security in the hefty dividend the company is supposed to pay. It all sounds backwards to me that someone would be willing to lose 10% to gain 3% over the course of a year. Net net, isn't it still a 7% loss?

From my perspective, whether you're a day trader, swing trader, or longer term investor, applying some basic technical analysis to your search can help you a great deal. If nothing else it should keep you out of trouble. The impetus behind today's article is that I'm seeing quite a few dividend-type stocks setting up in a bullish pattern and this may be a good guide for someone looking to possess a more income-driven portfolio. With that said, if the trend changes and stops are hit, one cannot be stubborn and gain a false sense of security through the dividend. At the end of the day it's still a trade.

BioMed Realty Trust (BMR) operates as a real estate investment trust (REIT) that focuses on providing real estate to the life science industry in the United States. Its tenants primarily include biotechnology and pharmaceutical companies, scientific research institutions, government agencies, and other entities involved in the life science industry. The stock yields just under 4% and as noted on the chart below looks to be breaking out of a year-long consolidation phase on the weekly chart. In order to protect from any unforeseen stock implosion I would view the $18 level as a good stop point.

After filing for bankruptcy and subsequently re-emerging a stronger company, General Growth Properties (GGP) now looks to be set up to move higher. Yielding 2.5% the growth of the stock is going to be necessary and in my opinion becomes a more speculative position. Furthermore, as the speculation rises, my desire to lengthen any leash becomes non-existent and is why I would be interested in this name with a $15.50 stop, which is right below the most recent pivot. Longer term holders could go to the $15.00 level but any more than that and my comfort level is maxed out.

Hersha Hospitality (HT) yields 3.9% after its most recent dividend increase. As a real estate investment trust, Hersha Hospitality engages in the ownership and operation of mid scale limited service hotels in the Eastern United States. Names like Courtyard by Marriot (MAR) or Hampton Inn occupy this REIT's portfolio and the share price looks to have found support around the $5.50 to $6.00 level as noted on the weekly chart. With a stop at $5.40 I like the risk reward on this play.

With a move toward income I'm finding more and more utility plays setting up with Vectren Corporation (VVC) being one of the best. The company provides energy delivery services to residential, commercial, industrial and other customers in Indiana and west central Ohio and yields almost 5%. The stock has been carving out a two-year rounded bottom and looks to be slowly gaining upward momentum. With a stop below the $25.00 level to avoid catastrophe, the risk reward looks favorable.

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