When I started investing for income, I didn't want to "waste time", I searched for the highest dividend yield to get the best bang for my buck. Here's how to avoid the mistakes I made
Dividend Yield
Yield = total earnings in the period / investment
Yield is the amount earned in a period of time (usually a year) as a percentage of what you invested. Higher yield is generally a good thing.
Dividend yield is just yield from dividends.
Dividend Yield = Annual dividend paid / the stock price.
An annual $5 dividend on a $100 stock means a 5% dividend yield.
Lesson 1: Increasing Yields are Misleading
Dividend yields aren't fixed like bank loans.
In our previous example, the yield can increase to 10% if the dividend increases to $10. OR if the stock price falls to $50.
Lesson 2: Today is not Tomorrow, But Respect History
A company that paid large dividends this year, won't necessarily pay large dividends next year. They might increase, decrease, or stop paying dividends altogether.
The rearview mirror can’t show us the road ahead, but if it’s been winding, we should at least prepare for more winding.
A company with a history of inconsistent dividend payments will more likely continue inconsistent dividend payments. A company with a history of quarterly dividend payments will more likely continue this practise.
Lesson 3: Listen to the Company
History is not your only resource. Often, just paying attention to what the company says can yield valuable information.
- Their investor website often explicitly calls out their dividend history and future approach to dividends.
- Executive notes to financial reports will often mention if a high dividend was extraordinary or expected to reoccur.
With just a little homework you can avoid the dividend yield trap and become a more successful investor.