Understanding High Yield Dividend Stocks

Dividends are a portion of the company’s earnings distributed to its shareholders. When and how much dividends are paid are decided by the company’s board of directors. While some shareholders are prioritized more when the time comes to distribute dividends, a common shareholder is usually eligible to receive dividend yields as long as they hold the stock prior to its ex-dividend date. If you are interested in building an investment portfolio comprised of high-yield dividends, read on further.

Dividend Payout Ratio

The dividend payout ratio pertains to the percentage of earnings distributed as dividends to the company’s shareholders. The formula for DPR is calculated as the annual dividend per share divided by the earnings per share. You can also compute it as dividends paid divided by net income. The DPR of stock can tell you several things, mainly the company’s level of maturity. Newer growth-oriented startups that usually need to reinvest their earnings into infrastructure will typically have low or zero DPR.

Types of Dividend Payout

Two main types of dividends publicly traded companies pay out to their shareholders – cash and stock. As the name implies, cash dividends are regular payments made in cash to a company’s shareholders. How much you receive in dividends is based on the position size you own.

Stock dividends, on the other hand, payout more company stock. For example, if company XYZ pays 10 percent in stock dividend and owns 100 shares, you get back ten shares added to your existing position post-payout.

Features of High Yield Dividend Stocks

While high dividend stocks can come from different market sectors, the underlying companies offering them usually share similar features: earnings consistency. Since dividends can only be paid out if a company is consistently profitable, you’d want the company to be consistently generating solid earnings and a steadily increasing dividend payout.

You can also simplify your search by looking for so-called dividend aristocrats, which are S&P 500 companies with considerable years of consecutive dividend yield increases. Currently, there are 25 companies included in the dividend aristocrat list, such as IBM, ROP, and LOW.

Strategies For High Yield Dividend Stock Investing

Profiting from dividend stock investing can be done in two ways – long-term and short-term. Long-term dividend investing simply involves holding companies that pay off dividends for many years to take advantage of the continuously increasing dividend yield payout. According to Money Morning, reinvesting the cash dividends you receive quarterly or yearly helps long-term investors grow their dividend payouts through long-term compounding.

Meanwhile, short-term dividend investing involves buying a stock and holding it until the company pays out the dividend and then selling it right after. While this style of trading can be lucrative, any short-term capital gains earned are subject to a higher taxation rate.

High-yield dividend stocks are considered to be less volatile and thus safer. They are a welcome addition to any long-term investor looking to make a steady, passive income.

This article is for information and educational purposes only and does not form a recommendation to invest or otherwise. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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