If you’re interested in receiving passive income from the stock market, then dividend stocks might be the right choice. To attract investors some companies will pay a cash dividend as a way for them to distribute profits to shareholders. The dividend yield is expressed in percentage terms and is calculated by dividing the dollar value of the dividend by the dollar value of the stock.
Examples of Dividend Yield
For example, International Business Machines Corporation (NYSE: IBM) pays its investors an annual dividend of $6.28 per share. The dividend is broken down into four payments and distributed quarterly.
If IBM’s stock price is $116.83 and it pays an annual dividend of $6.28, then its current dividend yield is around 5.37%.
Here’s another example:
If General Electric Company (NYSE: GE) pays its investors an annual dividend of $0.48 per share and is trading at $9.58, then its dividend yield is 5.01%
Now, the dividend yield will change along with changes in the stock price. It is not a rate that is locked in nor is it a guarantee. For example, if a company is going through a difficult financial period, it may choose to cut or eliminate the dividend, as the case with General Electric.
Should You Buy High Dividend Yield Stocks?
There are several factors you should consider before investing in a stock. For example, if you invested in GE because of the dividend, then you would have lost money as its stock price was in free fall from late 2016 to 2018.
Some companies chose to re-invest profits into the business instead of distributing a dividend. For example, Amazon, Facebook, and Alphabet currently pay no dividends to investors.
Even the great Warren Buffett doesn’t like paying dividends. His company, Berkshire Hathaway, has historically not paid its investors an annual dividend. However, that doesn’t mean he doesn’t love receiving dividend payouts.
Companies like Microsoft, Apple, Wal Mart, Intel, and Disney are still growing. All five of them pay their investors a dividend. Ideally, you want to find the best of both worlds, a dividend paying stock that is still growing.
A high dividend yield could mean that the company’s stock has been performing poorly.
Now, if stock picking is something you struggle with but find high dividend yield stocks interesting then consider looking at dividend ETFs.
The SPDR S&P 500 Dividend ETF (NYSE: SDY) is an ETF that tracks an index that screens for companies that have consistently increased their dividend for at least 20 consecutive years, and weights the stocks by yield.
Some other ETFs in the category include iShares Select Dividend (NASD: DVY), and Vanguard High Dividend Yield ETF (NYSE: VYM).
A high dividend yield stock can be attractive only if its business is strong. Dividends have always been a way for companies to distribute profits. However, stock buybacks is another way to achieve similar results. Some companies prefer stock buybacks over dividends. While some like Apple engage in both activities, stock buybacks, and dividends.