Dividends can be a significant source of income for investors. The dividend yield is a measure for determining how much income a stock provides. However, very high yields can be a sign of an unsustainably high dividend that is likely to be cut.

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New Stocks and Growth Stocks

New stocks and growth stocks tend to have small dividends (or no dividends) and in turn low or no yields. This does not necessarily mean that the stock is a bad investment, though. Money that is paid to shareholders as dividends is money that cannot be used to grow the business. If the business is new, the benefit to the shareholder by using the money in the company to improve profits might outweigh the benefits of a dividend. An investor should assess each company on a case-by-case basis to determine the viability of a company, even when it does not issue large dividends.

High Yields

Very high yields should be viewed skeptically. First, a very high yield often signifies and significant drop in the price of the stock. Generally speaking, stocks do not suffer large drops in price without a reason; so, the high yield might signify a troubled company. Secondly, there are limits in cash flow such that large dividends cannot be consistently paid by many companies. Before investing, one should evaluate the payout ratio for the dividends. If they are over 75 percent, there is a good chance that the level of the dividend might drop.

Computation of Yield

Foreign Stocks

References

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