A Quick Guide to High-Yield Stock Investing: From Stock Selection to Allocation

What is a Reasonable Dividend Yield? Understanding this Core Indicator First

In stock investing, the dividend yield is a key metric for measuring dividend returns. Simply put, it reflects the proportion of dividends paid relative to the stock price each year.

The calculation is straightforward: Dividend Yield = Annual Dividends ÷ Stock Price. For example, if a company’s stock price is $10 and it pays $1 in dividends annually, the dividend yield is 10%.

However, this indicator has an important characteristic—it is composed of two factors. A high dividend yield may result from two situations: one, the company is actually increasing its dividends; two, a falling stock price leads to a relatively high yield. Therefore, when seeing a high dividend yield, further analysis is necessary to determine which situation is driving it.

Generally speaking, what constitutes a reasonable dividend yield depends on market conditions and company type. Typically, a dividend yield over 4% is considered relatively high, and stocks in sectors like real estate investment trusts (REITs), utilities, and energy often offer higher yields.

Why Do More Investors Favor High Dividend Yield Stocks?

Stable Cash Flow Returns

Unlike profits gained from rising stock prices, high dividend yield stocks provide relatively stable periodic cash income. Even amid market volatility, investors can still receive fixed dividends quarterly (or monthly). Many investors even use this income as a supplement to their daily expenses.

A Window to Assess Company Fundamentals

A company that can maintain a high dividend yield over the long term and continuously increase dividends usually indicates solid profitability and good financial health. Dividends ultimately come from profits; companies with losses or minimal profits cannot sustain dividend payments. This makes dividend yield an important reference for screening quality companies.

The Power of Compound Growth through Reinvestment

By reinvesting dividends, investors can achieve compound-like growth. Suppose you invest $10,000 in a stock with a 5% dividend yield, earning $500 in dividends in the first year. If you reinvest this dividend to buy more shares, your principal increases to $10,500, and subsequent dividends grow accordingly. Continuing this process for 5 years, the initial $10,000 could grow to $12,240, a 22.4% increase (assuming stock price remains unchanged). If the stock price also appreciates, the gains are further amplified.

Details Often Overlooked When Calculating Dividend Yield

When comparing dividend yields across stocks, the payout frequency is a factor that must be considered. Most listed companies pay dividends quarterly, but certain categories like REITs often pay monthly.

For example, Realty Income (O.US) and McDonald’s (MCD.US):

• Realty Income: monthly dividend of $0.25, annual total $3.05, yield 4.7%
• McDonald’s: quarterly dividend of $1.52, annual total $6.08, yield 2.3%

While the total annual dividends are not directly comparable, converting to annual basis makes it clear that although McDonald’s pays a higher total dividend annually, considering stock price factors, Realty Income’s yield is actually twice as high.

High Dividend Yield ≠ High-Quality Investment, Beware of These Traps

Risks of Pursuing High Dividend Yield Alone

A high dividend yield does not necessarily mean an investment is worthwhile. The key is to understand the real reason behind the yield increase. For example, ExxonMobil (XOM.US) saw its dividend yield drop from 6.1% in 2020 to 3.3% in 2022, which is not a bad sign—mainly due to a significant rise in stock price, with dividends increasing steadily from $3.48 to $3.65 during the same period.

Conversely, a sudden spike in dividend yield warrants caution. In 2020, ExxonMobil maintained its dividends despite losses, a signal that might not be apparent when only looking at the yield.

Payout Ratio Is a More Reliable Indicator

Compared to dividend yield, the payout ratio better reflects a company’s operational health. Payout Ratio = Total Dividends ÷ Net Profit, indicating how much profit is distributed as dividends.

If the payout ratio continues to rise while profits stagnate, it suggests the company is distributing a larger proportion of its profits as dividends, often a sign of operational difficulties. When investing in high dividend yield stocks, it’s essential to consider payout ratio, balance sheet health, and cash flow together.

How to Quickly Find High Dividend Yield Stocks

Using stock screening tools can greatly improve stock selection efficiency. By setting a dividend yield threshold (usually above 4% for high yield), along with criteria like market cap and dividend growth trend, you can quickly identify target stocks.

Many investment platforms offer such screening features. Typically, the steps are: open the filter menu, set parameters (dividend yield, market cap, dividend growth rate, etc.), and sort by dividend yield to generate a list of qualifying stocks.

High Dividend Yield Stocks from 2020-2023 for Benchmarking

Below are representative stocks with dividend yields consistently above 4% over the past four years, covering sectors like real estate, energy, and communications:

2023 High Dividend Yield Stocks

2022 Representative Stocks

Complete data tables for each year, including dividend growth years, average dividends and yields over the past 3 and 5 years, are organized for in-depth comparison.

What Is Cash Dividend Yield?

Cash dividend yield is the direct form of dividend yield, representing the ratio of dividends paid in cash by listed companies to the current stock price. It indicates the cash return an investor receives per share purchased.

Most US stocks pay dividends in cash rather than stock dividends or other forms. Unlike capital gains, which depend on stock price fluctuations, cash dividends are relatively stable. Although dividend yield varies with stock price, the amount of cash dividend per share generally remains steady, which is the core advantage of cash dividend yield.

Practical Steps to Start Investing in High Dividend Yield Stocks

The first step is to use the screening tools and fundamental analysis mentioned earlier to identify investment targets. The second step is to choose a compliant trading platform and complete account opening. The third step is to log into your trading account and deposit funds according to platform instructions.

Subsequent operations involve searching for stock codes, judging buy/sell signals, setting trade quantities and leverage ratios. Many platforms offer demo accounts; it’s recommended to familiarize yourself with trading processes using virtual funds to reduce risks. Once comfortable, you can proceed with real trading and monitor your holdings’ performance in real-time.

Summary: Rational Thinking in Dividend Yield Investing

High dividend yield stocks can provide stable cash flow and predictable income, but they are not the sole criterion for stock selection. Investment decisions should consider payout ratio, profit growth, cash flow, industry outlook, and other multi-dimensional factors.

Remember: there is no absolute answer to what constitutes a reasonable dividend yield, but over 4% is generally considered high, and over 6% warrants extra caution—possibly indicating severe undervaluation or accumulating risks. The key is to find quality companies with a history of stable dividends and sustainable profit growth, making each dividend a foundation for long-term wealth.