Investors can't live on dividend yield alone.

Why Dividend Yield Is Overrated


Far too many investors focus solely on dividend yield when researching and investing in dividend-paying shares. That might sound odd coming from the lead advisor of an investing service called Dividend Edge, but there are two primary reasons why choosing investments based solely on dividend yield is a lot riskier than some might think.

  • High-yield can mean high-risk: [The example of Domino Printing Sciences]: In other words, Domino's increasing yield during the financial crisis had little to do with the underlying business and more to do with general market bearishness.

    These are the types of opportunities that income-minded investors dream about because the market will likely turn around and should recognise the strength of companies that were thrown out with the bath water.

    Conversely, a spike in dividend yield during an otherwise strong market can be a sign that the payout is at risk.
  • Risk of sector concentration: At times, Mr. Market falls in and out of love with various sectors of the market, so when he's down on a particular industry, there tends to be a number of high-yield candidates in that space.

Comment: Good article from "The Motley Fool".

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