Income investors target the best long term dividend stocks.  It’s important to differentiate between stocks that pay high dividends and the truly best long term dividend stocks.

It is easy to get these concepts confused.  Stocks that pay high dividends may not be the best income stocks.  This is because the underlying factors for the high dividends may not be favourable for future yields.

Sometimes high dividends are due to a steeply declining stock price.  In cases like this, high dividends are very dangerous and not helpful for long term wealth building.

Avoiding high yielding but wealth destroying stocks is easy if you know what to look for. With this in mind, I have developed three easy to follow guidelines to follow prior to investing in any dividend stock.

Here Are 3 Knows To Know Before Income Investing:

1. Know Why The Stock Pays High Dividends

While this may seem very basic and even redundant, you would be surprised at the number of investors who simply never think about why their stocks have such high yields.  Understanding what causes the high yields is vital to avoiding distressed stocks that are high yielders.  You want to make certain the company is rising and has an unyielding plan for the future prior to investing.  In addition, be careful of companies with falling stock prices.  This can be signaling trouble!

2. Know The Sectors Average Yield

Right now the highest yielding sectors are companies set up as Real Estate Investment Trusts REITs,  Master Limited Partnerships MLPs, and Business Development Companies BDCs.

These business structures provide tax advantageous since they need to pay out the vast majority of their profits to shareholders in the form of dividends.  Searching in the sectors with BDCs,  MLPs and REITs can put you on the right track to find solid high yielding stocks.

3. Know The Traps

The best way to avoid dangerous dividend traps is to check the dividend paying history of the company.  Are the dividends steadily increasing over time?  Does the company make sense provided the current economic climate?  Does the company have solid plans for the future?  Answering these questions in the affirmative can go a long way to prevent you from falling into a dividend trap.