A nice, simple straightforward answer would be great, wouldn’t it? Yeah, well, that’s not what you’re going to get. The best answer I can give is: it depends. The good news is that I will tell you which two factors you should look at. Please keep in mind the fact that a stock’s yield alone is never enough information to base a buying decision on; it is a starting point, not an end point. Personally, I use dividend yield as one of my first filters so narrow down my buying options, but it is far from the last factor I consider.
As I have written previously, dividend yield is the return you collect on money you have invested in dividend paying stocks. At first blush, it would seem that the obvious thing to do would be to use a stock screener to come up with the stocks that have the highest dividend, and to purchase as many of those as you can. Well, if it were that easy, everybody would do it, and investing would be a lot simpler than it is. A dividend yield that’s too high can be a message that you should stay away from a stock.
A yield that’s too high? Whachootalking’bout, Willis?
Unfortunately, yes, there is such a thing as a yield that is too high. Recall that a stock’s yield is the product of the interplay between the stock’s price, and the stock’s dividend. There are only two ways for the yield to go up: either the dividend goes up, or the price of the stock comes down.