High Dividend Yield Stocks? - Part 8

Read older post on? High Dividend Yield Stocks? - Part 7

I believe all investors will love high dividend yield unless you are a day trader who don't really need to care on dividend.

Imagine a high dividend yield bandwagon is rolling past you. A few people on the back of the wagon are partying and playing music of their lives and singing the song of high yield. You may be unable to resist the sweet sounds being played and run to join the party.

But, before you jump on the bandwagon, you may want to wonder a bit as there can be more than one way of looking at high yield; its associated risk of future dividend cut and impact to its stock price.

A. High Yield High Growth

I don't think you can find it now in the current market. If you can find it, don't tell anyone. Sell your car and mortgage your home and load it up! Just kidding. LOL

You are more likely to find high yield high growth stocks during big bear markets but you may not have courage at that time to load them up so it is pretty hard to load up high yield high growth stocks in your portfolio.

B. High Yield Low Growth

Even in the current market condition (STI at 2936 quite near to its recent high), you can still find some low hanging easy reach high yield stocks. How come?

Unless you believe that market is lack of smart money or big boys, otherwise there may be valid reasons why these big boys or smart money choose not to chase them up and naturally it will cause the yield to fall for new buyers.

High yield may be an indication of low growth and investors are expecting higher income to compensate for low growth so market may have priced in that expectation.

C. High Yield High Payout

High yield due to high payout e.g. company paying out 90% or more of its earning. Future dividend is never a sure thing and can be cut.

For companies that are paying too much of their earning as dividends will have less reserves and they are more likely to cut dividend when earning is hit.  How will market react to its dividend cut? Is this a risk worth taking for chasing recent high yield?

D. High Yield  Asset Light

High yield due to company changing strategy from asset heavy to asset light. This is not sustainable in the long run as there is a practical limit to how light asset can be.

E. Medium Yield High Growth

Medium yield due to lower payout e.g. company paying less than 50% of its earning and using the rest to fund its growth. There is more opportunity for the market to price in its capital appreciation in the long run; but less likely for dividend cut since its dividend payout ratio is not high so there is more room for earning hit. In the long run, a lower payout may actually provide a more steady yield even in bad economy.

This may be a better dividend yield strategy for a long-term investor.

In Conclusion

Dividend is a sub-set of earning so it is the future earning that counts. So don't fall into high yield trap! The attractiveness of RECENT high yield ALONE may not drive stock price. When the stock price increases, the yield decreases so the recent high yield can only drive the stock price to a certain level and become unattractive and stop there.

In the long run, it is high growth that drives higher earning which will then drive stock price and may  increase your personal purchase yield  but recent buyers will get lower yield.

Higher capital appreciation can mean that you have already collected multiple years of dividends well in advance. A multi-bagger with high yield is the dream of every investor who loves yield.

I love A and E more. How about you?


Read more? High-yield, low-payout stocks stand out