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Good Sell Rules Also Apply To Stocks With Dividends

"" is an oddly self-contradicting word. It means, on one hand, to produce or furnish payment. On the other, it means to surrender.

When the market begins to correct, income investors must become alert to which definition of yield they apply.

Dividend yields are a healthy way to generate income from investment and to boost overall return on specific stocks. But when a correcting market begins to eat into a stock's share price — an investor's capital — all the standard sell rules still apply.

This seems a little counterintuitive. Dividend payments typically remain stable, even as a stock's price declines. An income investor can enjoy steady income throughout the span of a stock's correction.

This often lulls shareholders into a false sense of security.

Steady income is a wonderful thing. And income investors tend to buy into older, established, "blue chip" companies. These companies tend to be less volatile and are often less "risky" than many in the growth-stock category.

But blue chip is also a poker term, and it underscores that even high-value chips are gambling scrip. This is why even the most staid investors must know and mind their sell rules — particularly in a correcting market.

Income investors collected a substantial dividend as they watched shares of Strayer Education (STRA) rise 180% between January 2006 and April 2010.

Then the market slipped into a correction. Strayer built a base through May and June 2010, climbing back above its 10-week moving average.

Then the stock saw surge as it broke through both its 10- and 40-week lines of support in the week ended June 25. 1 These are powerful sell signals.

Perhaps some income investors rationalized that Strayer had taken hard hits before and always rebounded to .

But on Aug. 16, the operator of for-profit colleges, gapped down 18% in massive trade. 2 Savvy investors booked their profits and moved on to greener pastures.

Investors that kept Strayer received a 7% dividend yield, even as the stock toppled more than 80% from its April 2010 high. The company last week suspended its dividend, as falling earnings were no longer able to support the payout.

A scan of IBD's Big Cap 20 at that point would have unearthed Kinder Morgan Energy (KMP). Its dividend yield, at 6%, was slightly lower. But the stock rose 16% over the next eight months before flashing sell signals of their own in May 2011.

For insights into top-performing income stocks, check IBD's daily Income Investor column.