12 High Dividend Investing: Key Points You Should Know

Dividend yield is calculated by dividing the dividend per share by the stock price. Many investors prefer companies with high dividend yields, a strategy known as high dividend investing. What are the key points to consider in high dividend investing?

First, there are four main factors that affect dividend yield. Net profit is crucial; the more a company earns, the more it can afford to distribute as dividends. Cash flow is also important; there must be a net inflow of cash to sustain dividend payouts. The payout ratio, or the percentage of net profit paid out as dividends, indicates a company's willingness to distribute earnings. Lastly, the stock price or valuation, being the denominator in the yield calculation, means that all else being equal, a higher stock price results in a lower dividend yield.

Secondly, the potential benefits of high dividend investing are mainly twofold. It generally offers shareholders stable and generous dividends, providing a steady stream of cash flow for personal use or further investment. Furthermore, companies with a history of consistent high dividend payouts are often perceived as operationally sound and fairly valued, traits that tend to attract value investors and lead to greater stock liquidity.

Thirdly, high dividend investing comes with its own set of risks. Special dividends that are issued on a one-time basis can temporarily boost the dividend yield, giving a false impression of ongoing returns. In cyclical industries, high yields may be present during periods of profit growth but can fall sharply in downturns, leading to substantial fluctuations in the yield and making high payouts unsustainable in the long term.