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.
As part owner of a company, it is only right that you should share in the profits. Dividends are the means by which owners are paid. Personally, I have found receiving money on a regular basis for no work addictive. Here is a breakdown of how dividends work in practice.
Companies that issue dividends typically do so annually, quarterly, or monthly, with the latter two options being by far the most common. I don’t have any numbers to back this up, but it seems to me that over the last decade or so, there has been a trend towards monthly payments. Whether that’s the actual case or not, you should be aware of when your payments will be delivered. Personally, I prefer monthly payments, as it evens out my cash flow, and will provide me with regular monthly income upon retirement. (…many, many years from now.)
Even if you invest in companies that pay quarterly, it is possible to develop a portfolio that pays you roughly the same amount of money each month, although a bit more care is needed in building your portfolio. Companies that pay quarterly will be in one of three possible dividend cycles. This is probably best explained with an example:
Change isn’t bad for all companies. I remember visiting a historical park fifteen years ago, and setting eyes on a weigh-scale that had “International Business Machines” prominently displayed on it. IBM has certainly had ups and downs over the past century, but they are still very much a going concern. This is because they have adapted to changing times and have not gotten complacent with their business. IBM’s initial business has long since gone the way of the Do-Do, but not all companies are as nimble. It might be instructive to go through a list of previously great companies that have recently withered and died : Enron, Lehman Brothers, Kodak, Eaton’s, and RIM, currently hanging on by the skin of its teeth. But that’s not what this post is about. This post is about fearlessly predicting which currently-great companies (or industries) may stumble in the future. These predictions will all seem ridiculous now, and I’ll probably be wrong on most, if not all of them, but it’s still a good idea to keep an open mind about a changing world.