I have written a lot about buying dividend paying stocks, holding them for life and collecting an every increasing stream of income.
So why not just buy the stocks that pay the most money in quarterly dividends?
Remember yield refers to the total annual dividends collected as a % of the share price. So if a stock costs $100 and pays four quarterly dividends of $2.00 each ($8.00 annually) the stock would be said to have an 8% yield.
8% of $100 = $8.00 paid out as a $2.00 dividend every 3 months.
When stock prices fall, dividend yield raises. If our example stock dropped from $100 to $50 the yield would jump from 8% to 16%. The stock would still be paying $8.00 a year in dividends, but that amount would now represent 16% of the share price.
16% of $50 = $8.00 paid out as a $2.00 dividend every 3 months.
This math is pretty simple, but illustrates why you should be cautious if you see a high dividend yield. It usually means the share price has recently dropped and the dividend yield spiked.
Stable companies that pay dividends usually pay somewhere in the 3%-5% range. If you see a dividend yield higher than this you should usually do some more investigating.
Right now there is a company called Chorus Aviation that is in the financial news. The stock pays a mouth-watering 25% dividend yield. The reason the dividend yield is so high is because the stock has lost half its value in the past year. The company has already cut its dividend in half once and there is a good chance it will cancel it all together (if they don’t go bankrupt first).
At one point I was looking at both Le Chateau and Yellow Media because they had an attractive 10% dividend yield. Both companies have since stopped paying a dividend and Yellow Media is on the verge of bankruptcy (who uses the Yellow Pages anymore?).
So don’t be tempted by high dividend yield. Instead focus on companies that have a long history of paying a consistent dividend that they slowly increase over time.
One of my favourite dividend paying stocks that I own is Bank of Nova Scotia. It currently pays a dividend yield of 4.08% and has increased its dividend in 42 of the past 45 years. Even more important is that they haven’t missed a dividend payment since 1833.
Based on this history, I am pretty confident that that dividend income will still be there by the time I retire and want to collect it.
Remember, I am not a certified financial advisor. You should use the information on this site to give you investing ideas only. You should then consult with a financial professional before making any investment decisions.