Investing in High Dividend Yielding Stocks
While it is true that investing in high dividend yielding stocks can deliver a good income stream, what many don’t realize is that the reason these stocks are most likely paying a high yield is because they are falling in value, which impacts on your overall portfolio return.
That’s why it’s important to understand that as the price a stocks falls, its dividend yield rises and, therefore, becomes more attractive to investors seeking dividends for income.
Some would have you believe that a high dividend yield means the stock is inexpensive, which, therefore, provides an opportunity for investors to achieve good capital gains.
But what this really means is that the stock has fallen to such an extent that the dividend yield is now more attractive.
While investors don’t want high risk investments, this is exactly what they are getting when they buy a stock that if falling in price just to receive a high dividend yield.
It is for this reason why I don’t recommend investing on dividends alone.
The stock must represent good value, first and foremost, in terms of capitals gains. In other words, you should look for undervalued stocks that are likely to achieve solid growth in terms of capital gains and a good income in the future.