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A lot of investors look at a high dividend yield as a warning sign.
Sometimes it is, but sometimes it’s a good business undergoing a change that the market hasn’t recognized yet.
If you can find one of those and be patient, you can get paid very well to wait.
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Obviously the income from a high yield stock is interesting, but that's not the only reason to consider investing in one.
High yield stocks also perform very well overall.
Companies in the top 40% of dividend yields outperform the S&P most often:
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I think there are two major myths when it comes to high yield investing.
Myth 1: High Yield Means A Company is Paying Out All Its Earnings
A lot of investors believe that a high yield stock is a company that’s paying out nearly all of the earnings in dividends.
But that’s not necessarily true.
The 20% of stocks with the second-highest dividend yields have an average payout ratio of less than 50%.
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That leaves plenty of cash in the business for things like operations, investing for growth, etc.
Myth 2: High Yield Stocks Are For People Who Need Income Today
Another common belief is that high yield stocks are for people who need the income soon.
The idea is that if you don’t need income today, you should buy a dividend-growth stock instead.
Dividend growth investing is a great strategy, we love it here at Compounding Dividends.
But it’s not the only way to grow your passive income.
Buying a high yield stock with low growth and reinvesting the dividends can work well too.
If you’d have invested $10,000 in Verizon 10 years ago, here’s how things would have looked with and without dividends reinvested.
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You end up with about $1,500 more if you reinvested your dividends.
Doesn’t seem like much right?
Look a bit closer - look at how many shares you own in each scenario:
Dividends reinvested: 314.93 shares
Dividends not reinvested: 183.49 shares
Think about what that means for your income.
Verizon currently pays $2.83 per share, so here's the income per year in each scenario:
Dividends reinvested: $891.25/year (314.93 shares * $2.83)
Dividends not reinvested: $519.27/year
Your income is 70% higher when you reinvest your dividends.
That’s because even though the business, and dividend payment didn’t grow that much, your ownership did.
In Part 3 of our earnings update, paid partners will get an earnings update on three businesses in our High Yield portfolio that are undergoing changes we’re getting paid to wait on.
📊 Community Pulse: How Do You Handle High Yield?
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