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Investing in High Dividend Yield Stocks

Updated on October 23, 2012
Investing in High Yield Stocks.
Investing in High Yield Stocks. | Source

Investing in High Dividend Yield Stocks

Investing in High Yield stocks can be a win-win situation in both good and bad market conditions. Most small investors turn to bonds when they are looking for monthly income instead of stocks or equities. Stocks can serve the need of good cashflow instead of only capital gain. It just requires some simple knowledge and time.

Investing in good quality stocks for high dividend yields can be a smart way to earn good, consistent money.


Mechanism of Investing in High Yield stocks:

When doing stock research, our focus need to be on high dividend yields on good fundamentally sound stocks or equities. If our priority is just stock price growth to get highest capital gain, then the dividend yield might be left out. Hence, looking and comparing dividend yields need to be our priority when choosing stocks for investment.


Benefits of Investing in High Yield Stocks:

1. Good Cashflow. When we invest in high yield stocks, we can expect to get consistent monthly or quarterly cash returns. This cash is free for investors to use for paying their expenses, luxuries or reinvestment. It gives good liquidity for retirees who are looking for monthly cashflow and extra income to those who are working.

2. High reliability and consistency. High dividend yield stocks have a high tendency to be more stable and fundamentally strong as compared to non-dividend stocks. These stocks tend to bounce back after recession or down period.

3. Provides hope and money in bad times. During bad times, stock price might fall. Investors can still rely on reliable dividend yields and wait for longer period for the stock to recover.


Drawbacks of Investing in High Yield Stocks:

1. Need to pay tax on dividends. Dividends are income and they are subjected to taxes. So, the net amount you receive as dividend is reduced due to tax deduction. However, reinvesting your dividends by using DRIP (direct reinvestment plan), might help to avoid this regular taxation.

2. Low Growth. High dividend yield stocks might show less capital gain in stock prices as high amount of dividends are paid consistently. The cashflow is good but the capital gain tend to be less.

3. Research and Study required. High dividend yield requires good, systematic research to understand the stock fundamentals and technicals. After due research, if the stock fulfills the criterion of strong fundamentals and high yields, it might be good idea to invest in such stock.

Hence, if your objective is monthly cash flow instead of pure capital gain, then investing in high yield stocks might be good choice for you. However, caution is required to check whether the high yielding stock has good fundamentals and it can withstand rough times. Investing education is utmost important and readers are suggested to study more before undertaking any new investment. All advice in this article is for suggestion purpose only.


Investing in Dividend Yield Stocks:

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