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Jun 25, 2020

Pros and Cons of High-Dividend Stocks

By Team Stash

Take a look at the benefits and drawbacks of high dividend stocks to get a better idea for how these securities can contribute to a diversified portfolio.

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Investors typically expect a return on their investments when they put money in the stock market. One way they can get a return is through an increase in stock value. Another way is through a dividend payment.

A dividend is a payout, or reward, paid by some companies to their shareholders as a share of the company’s profits. While they’re typically distributed as cash, they are sometimes rewarded in the form of additional shares. And by reinvesting dividends, you can potentially increase the impact compounding has on your portfolio’s total returns.

But not all dividend-paying stocks are created equal. Some are known as high-dividend stocks, because they deliver above average dividend yields relative to their share price. We explain more about high-dividend stocks below.

What companies pay dividends? 

Not every company pays a dividend, though. It’s usually older and more established companies that do. In fact, the majority of the companies on the S&P 500 index pay dividends, and nearly half of these reportedly have a higher dividend yield than the current rate of the 10-year Treasury, which is a benchmark investment in the world of bonds.

How do I know if a stock pays a dividend?

Stash offers stocks that pay dividends, funds of dividend-paying companies on the S&P 500 and investments that offer no dividends Take a look at the table below that allows you to sort all investments on the platform by dividend yield (highest to lowest):

This information is only educational The historical performance data quoted represents past performance, does not guarantee future results, is provided “as is” and solely for information purposes, is not advice or for trading purposes, may be subject to delays, should not be used for tax reporting, may not reflect actual future performance, and is gross of Stash fees. Prices may vary due to network availability, market volatility, and other factors. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted. There is a potential for loss as well as gain that is not reflected in the information portrayed. The performance results shown do not represent the results of actual trading executed using client assets. Investors on Stash may experience different results from the results shown. 

What is a high dividend stock?

The table above lists the dividend yield of all investments offered by Stash. A dividend yield is a mathematical formula that measures a company’s annual dividend payment compared to its share price. The dividend yield of a particular stock is calculated by dividing the annual dividend per share by the price per share, and multiplying that by 100. You can do your own calculation or use a table like the one above to find out the dividend yield. 

The dividend yield of a stock inversely relates to the price of the stock. So, if the price of the stock increases, the yield will decrease. And if the price decreases, the yield will increase. 

A high-dividend yield is one that falls above the average yield of stocks sold on that market. For example, the average dividend yield of the S&P 500, which is known as the market’s main bellwether, is 2.31% and usually hovers around 2%. So, a stock with a dividend yield of say 5.3% would be considered a higher dividend stock.

The Benefits of High-Dividend Stocks

High-dividend stocks come with benefits and drawbacks. A high-dividend yield might mean that the company is in a good position to pay out high dividends relative to how much you’re paying per share. So you’re getting a good deal for what you paid. 

Remember that you can reinvest dividends automatically into stocks and ETFs using DRIP. Higher dividends can mean more money to reinvest and further grow your accounts.  

The Drawbacks of High-Dividend Stocks

However, a high-dividend yield can also indicate that a stock is a risky investment, and it doesn’t necessarily mean you should automatically invest in that stock.

Here’s why: When the stock price drops relative to the dividend, the yield will increase. (Remember our ratio above, where a stock’s price and dividend yield move in opposite directions.) So, while a low share price and a high-dividend yield might seem like a great combination, it might also spell volatility for that company. If you’re interested in investing in a company with a high dividend yield, make sure to do your research about news related to the company. 

Additionally, research other important performance metrics such as revenue, profit, losses, and P/E ratio. And when you’re ready to invest, remember that you can start with any dollar amount on Stash. 

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