Course 306: Dividend Yield
High Dividends = Good Defense
In this course
1 Introduction
2 Dividend Yield Measures Dividends
3 Who Has High Dividend Yields--And Who Doesn't
4 The Tale of Shrinking Dividend Yields
5 High Dividends = Good Defense

 

But with dividend yields at an all-time low and other price multiples at all-time highs, prudence suggests taking a look at high-yield stocks. Not only do dividends help cushion the effect of any fall in price, but high-yielding stocks as a group tend to hold up better in bear markets than most other stocks. 

For example, the popular Dogs of the Dow approach, which involves buying the 10 highest-yielding stocks among the 30 Dow Industrials, performed best in the bear-market years of 1973, 1974, and 1977. Over the years, owning a few high-yielding stocks has proved a good way to diversify a portfolio. 

Not all high-yield stocks are defensive plays, though. A stock's yield may go up because its price has plummeted, often for legitimate reasons. (Remember, dividend yield is the dollar amount of the dividend divided by the stock's price.) A high dividend yield may also indicate that the market expects the company to cut or eliminate its dividend, leading dividend-oriented investors to sell off the stock and the stock price to fall. The best high-yielding stocks have strong cash flows, solid balance sheets, and relatively stable businesses. A history of steady dividend payments is also a good sign. 

When a company's fundamentals are solid, dividends can be a welcome bonus for shareholders and an indication of stability. They may be out of favor right now, but, like the hero's sidekick, sometimes they can save the day.

Next: The Quiz >>


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