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“I invest only in the highest dividend yield stocks”.
This is one of the most common phrases you’ll hear when you talk to income investors. While it makes sense to go for a high a yield as possible if you’re seeking dividends, the question is — do the highest dividend yield stocks make you a winner overtime?
Ned Davis Research conducted a study and divided companies into five different categories – S&P 500, non-dividend payers, dividend payers, dividend growers & initiators, and highest yield.
Ned Davis Research wanted to know the returns of investing $10,000 in each of these categories from 1971 to 2013. Here are the results:
Dividend growers & initiators gave the highest return; $10,000 invested would give you a cool $559,700 beating the S&P 500 index. And surprisingly, the highest yield stocks would have lost you money; $10,000 there would have given you less than half your money back. Ouch!
Why is this so?
The key to investing for income is not to invest in the highest yield stocks but to invest in stocks that pay sustainable dividends. And if you dig deeper, you’ll realize why the highest yield stocks underperform in the long run. Here are three reasons:
[Pro Tip: If you are investing for income, then Here’s a Quick 7-Step Guide to Help You Become a Better Income Investor]
When looking for dividend stocks to invest in, always focus on the sustainability of dividends rather than highest yield alone. Always remember to exclude special dividends and avoid investing in cyclical companies for dividends. Ultimately, if you want to enjoy long-term growing dividends, you need to pick a company that has strong fundamentals and a superior business model that allows the company to grow its revenues and profits for many years to come.
[**F&B businesses are one of the easiest business to analyze for good capital returns. Do you know which local F&B companies actually make money outside of Singapore? Here are 4 of them… and each good companies to take note of: 4 Local F&B Companies That Make Money Outside Singapore ]