High dividend yield stocks
A company can utilize the profits it makes in two ways:
- 1. Reinvest it into the business
- 2. Share it with the shareholders of the company – pay dividends.
Dividend yield of a share is the ratio of dividend paid per share to the current stocks price of the share. Stocks that have a high dividend yield compared to a benchmark are called high-yield stocks or high dividend yield stocks. The benchmark selected varies with the analyst, and so do the stocks they consider as high-yield. A high-yield stock is considered a good investment as:
- 1. High dividend yield indicates that the share is underpriced by the market
- 2. Dividend can act as a source of passive income
How to assess the high dividend yield stocks?
While companies that have a high dividend yield are considered safe, it is important to remember that it is not the high yield that makes them safe. Rather, they have a high dividend yield because they are safe. Further, the dividend yield does not provide a complete picture. Dividend is but a portion of the returns you earn from a stock – rest of it is from capital appreciation. If you compare the dividend yield of a stock with the yield from a fixed deposit – you would typically find that the dividend yield is lower despite the higher risk that stock investments carry. A better way to assess a stock would be to look at its earnings yield instead. Most analysts use a forecast of future earnings when valuing a company.
How to understand which are the good dividend paying stock companies?
Once you have identified high dividend stocks, decide on which ones to invest in using fundamental analysis. Remember that stocks that pay dividends can always decide to reinvest without paying them if they run into bad times. That said, if you are investing for dividends – make sure that they are strong performers in their respective sectors, like blue chip stocks
Benefits of investing in high dividend yield stocks
- Dividends act as a consistent income
- If you reinvest dividends, your portfolio will grow at a healthy pace
- In some cases, high-yield indicates the company can ride out tough markets