High Dividend Yielding Stocks
Does a High Yield Dividend stock such as 45% mean that it is not worth buying? How could a company have such a high dividend yield rate? One of the companies I invested in has a dividend yield that high, I am very confused how this happens?
Could someone explain to me how this is possible ?
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If a stock is showing a 45% dividend yield I would not expect that dividend to be paid out. It would likely indicate a drastic reduction in price and they have just not yet announced they will cut their dividend. A good dividend stock that I have been following, a utility company, is around 5% dividend yield right now and that is a strong dividend.
Does a High Yield Dividend stock such as 45% mean that it is not worth buying? How could a company have such a high dividend yield rate? One of the companies I invested in has a dividend yield that high, I am very confused how this happens?
Could someone explain to me how this is possible ?
Several reasons, not necessarily in the order of importance:
Firstly, it is possible that the dividend is calculated incorrectly. For example, it could be old "dividend per share" information, or old "share price" information. Stock splits can affect the share price, but the dividend information may not be adjusted to take into account splits. E.g. splitting a share into 5 will change 9% dividend yield to 45% dividend yield, seemingly, unless the dividend is adjusted too.
Secondly, it is possible that there is a major stock market crash that has left investors not believing in the future. For example, if the coronavirus pandemic was more lethal than it is now: leaving 3% living instead of leaving 3% dead. Then it could be very well possible that nobody is willing to buy a stock unless getting 45% dividend yield.
Thirdly, it is possible that the company is in trouble: the dividend will be cut severely in the near future.
Fourthly, it is possible that the company has sold much of its business via a cash transaction, and is distributing the cash as a one-time payment back to the investors.
The rule is, you won't find a stable 45% dividend yield.
Does a High Yield Dividend stock such as 45% mean that it is not worth buying?
No - it just means that its recent dividends were 45% of its current price. It could mean that the price has tanked recently, inflating the average. If it paid out 4.5% previously but the stock is now worth 10% of its value at the time of the dividend, then its current dividend rate would be 45%. Whether it will continue to pay dividends at that rate, or whether its share price will go up (reducing the yield) is not known, so there's no way to say for certain if it's worth buying or not.
How could a company have such a high dividend yield rate?
Most likely it's because the share price has dropped dramatically, inflating the dividend rate. I don't know of any company that has enough spare cash to pay out half of its value in dividends.
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