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Why You Need High Dividend Stocks In Your Portfolio

In this post, I am going to provide you with a overview of high dividend stocks so that you are able to decide if they are right for you.

What Is a dividend

When you own a stock, you are actually part owner of that company. For example, if you went to the stock market and bought 100 shares of McDonald’s you are now effectively a part-owner in that company. As a result of that, you have certain rights. One of those rights is to receive a dividend if the company does pay them out.

That dividend you receive is a cash payment from the company’s earnings. Let’s say that McDonald’s has a dividend of $1.50 per share. That means that you, as an investor, will receive $1.50 x 100 shares or $150 per year in dividends from the company. That is paid into your brokerage account. There are stocks that pay lower amounts in dividends, and then there are those high dividend stocks which we are after.

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What is a High Dividend Stocks

With high dividend stocks, that dividend payment is large. In some companies, you can receive sometimes up to $3 – $4 per share in dividends. This can add up into some real substantial income as you accumulate more shares, and even better if the company you own continues to increase the dividends it pays year after year.

Why Not Invest in all High Dividend Stocks

So you are probably wondering, if high dividend stocks are so good, why not put all your investment dollars into them. It is a risk reward issue. Sometime, the higher the dividends the more risk an investor takes. However, it is not about the actual dividend dollar amount. That can be high for some companies and low for others. The important metric that you need to be aware of for high dividend stocks is the dividend yield.

Dividend Yield

The dividend yield is the dividends paid divided by the company’s share price. As an example, if a company has a dividend per year of $2.00 and the share price is $45 per share, the yield is 4.44%. That means that you are receiving 4.4% return on your investment from dividends. Add that do any growth in share price and you are getting a good return. For a high dividend stock, we want to see a high dividend yield – but not too high.

For high divided stocks, it is actually more important to look at the dividend yield trend than it is to look at the actual dividend yield. For example, if a stock has a nice high dividend yield of 4.4% today, and over the past five years the dividend yield has floated between 3.5% and 5% then the 4.4% seems pretty normal and could be a good investment.

However, if our high dividend stock has a yield of 4.4% but the historical dividend yield has been 1% to 2%, then the price has gone down a lot and there may be something wrong with the company. It may be a good time to buy, but it may not be. You need to research what has happened before you make the investment decision.

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Summary

High dividend stocks can be a great investment. The produce wonderful income for the investor. However, they should not make up all of your portfolio and to decide if the stock is worth buying, an investor would be smart to research the historical dividend yield and see how that compares with todays yield. If the high dividend stocks you find have yield that are not too far out of whack, then they may be worth a further look.