Dividends4Life: The Pitfalls Of High Yield Stocks

The Pitfalls Of High Yield Stocks

Posted by D4L | Monday, November 25, 2013 | | 0 comments »

High yield stocks can lure the unwary investor into a sort of financial honey trap which follows the deceptive logic that ‘if a little is good, more must be better.’ The ‘yield’ in question is dividend yield. There is no question that a well-chosen selection of dividend-paying stocks can be an asset to any portfolio: Studies have shown that companies that pay dividends have more reliable earnings than those that don’t [Douglas J. Skinner and Eugene F. Soltes, professors at the University of Chicago and Harvard University, respectively]. Over eight decades through 2010, dividends contributed 44% of the stock market’s return, according to Fidelity Investments. During the 1970s dividends generated 71% of returns.

Dividend stocks in general beat those that don’t pay dividends and the key measure for determining a stock’s dividend is the dividend yield. [Douglas J. Skinner and Eugene F. Soltes, professors at the University of Chicago and Harvard University respectively, concluded, “We find that the reported earnings of dividend-paying firms are more persistent than those of other firms and that this relationship is remarkably stable over time. We also find that dividend payers are less likely to report losses and those losses that they do report tend to be transitory losses driven by special items.] The dividend yield shows what percentage a stock returns in relation to its share price. It is calculated as the annual dividend per share divided by the stock’s price per share.

Source: Forbes

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