How do dividend yields impact stock selection?

Higher dividend yields attract income-focused investors, but extremely high yields may signal financial instability.

1. What is Dividend Yield?

Dividend yield is the percentage of a company's share price paid to investors as dividends annually. It is calculated as:

Dividend Yield (%) = (Annual Dividend per Share / Share Price) × 100

• High Dividend Yield: Indicates strong cash flow and stability.
• Low or No Dividend: Common in growth stocks, focusing on reinvestment.

2. How Does Dividend Yield Impact Stock Selection?

Investors use dividend yields to evaluate income-generating stocks, but the context matters:

• Consistently High Yields: Suggest financially strong companies.
• Sudden Yield Spikes: Could signal stock price declines due to market concerns.
• Diversification: Balancing high-yield stocks with growth stocks is key.

3. High Dividend Yield vs. Dividend Traps

Not all high-yield stocks are good investments. Some may be dividend traps—companies struggling financially but offering high dividends to attract investors.

Factor	Healthy Dividend Stocks	Dividend Traps
Stable Earnings	Yes	No
Dividend Growth	Consistent	Irregular
Stock Price Trend	Stable or rising	Declining

4. How to Use Dividend Yield in Stock Selection?

Follow these strategies for a balanced dividend portfolio:

• Look for Consistent Payouts: Companies with stable or growing dividends.
• Check Dividend Payout Ratio: A sustainable ratio (<50%) ensures long-term payments.
• Diversify Sectors: Don't rely on a single industry for income.