A
high yield stock is a stock whose
dividend yieldThe dividend yield or the dividend-price ratio on a company stock is the company's annual dividend payments divided by its market cap, or the dividend per share divided by the price per share. It is often expressed as a percentage. Its reciprocal is the Price/Dividend ratio.-Preferred share...
is higher than the yield of any benchmark average such as the 10-Year
US TreasuryThe Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue...
Note. The classification of a high yield stock is relative to the criteria of any given analyst. Some analysts may consider a 2% dividend yield to be high, while other may consider 2% to be low. There is no set standard for judging whether a dividend yield is high or low. Many analysts do however use indicators such as the previously mentioned comparison between the stock's dividend yield and the 10-Year US Treasury Note.
A high dividend yield indicates undervaluation of the stock because the stock's dividend is high relative to the
stock priceIn the investment world, a share of stock represents a share of ownership in a corporation ....
.
A
high yield stock is a stock whose
dividend yieldThe dividend yield or the dividend-price ratio on a company stock is the company's annual dividend payments divided by its market cap, or the dividend per share divided by the price per share. It is often expressed as a percentage. Its reciprocal is the Price/Dividend ratio.-Preferred share...
is higher than the yield of any benchmark average such as the 10-Year
US TreasuryThe Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue...
Note. The classification of a high yield stock is relative to the criteria of any given analyst. Some analysts may consider a 2% dividend yield to be high, while other may consider 2% to be low. There is no set standard for judging whether a dividend yield is high or low. Many analysts do however use indicators such as the previously mentioned comparison between the stock's dividend yield and the 10-Year US Treasury Note.
A high dividend yield indicates undervaluation of the stock because the stock's dividend is high relative to the
stock priceIn the investment world, a share of stock represents a share of ownership in a corporation ....
. High dividend yields are a particularly sought after by income and value investors. High yield stocks tend to outperform low yield and no yield stocks during
bear marketsA market trend is a putative prevailing course or tendency of a financial market to move in a particular direction over time. These trends are classified as secular trends , primary trends and secondary trends...
because many investors consider dividend paying stocks to be less risky.
Dogs of the Dow
The Dogs of the DowThe Dogs of the Dow is an investment strategy popularized by Michael O’Higgins, in 1991 which proposes that an investor annually select for investment the ten Dow Jones Industrial Average stocks whose dividend is the highest fraction of their price....
strategy is a well known simple strategy which incorporates high dividend yields. The strategy dictates that the investor compile a list of the 10 highest dividend yielding stocks from the
Dow Jones Industrial AverageThe Dow Jones Industrial Average also referred to as the Industrial Average, the Dow Jones, the Dow 30, or simply as the Dow; is one of several stock market indices, created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow...
and buying an equal position in all 10 at the beginning of each year. At the end of each year, the investor finds the 10 highest dividend yield stocks again, and sells any stocks which are not still on the list. The Dogs of the Dow made a compounded annual return of 18% from 1975 - 1999 outperforming the market by 3%. This would make $10,000 turn into $625,000 in 25 years.
The Dow 5
The Dow 5 strategy is a variation of the Dogs of the Dow strategy. This strategy dictates the investor compile a list of the 10 highest dividend yielding stocks from the Dow Jones Industrial Average, and buy the 5 lowest priced of those 10 stocks at the beginning of each year. At the end of every year, the investor remakes the list, and sells any stocks which are not on the new list. This strategy has made an annual return of 19.4% from 1975 - 1999. This would make $10,000 turn into $840,000 in 25 years.
Foolish 4
The
Foolish FourThe "Foolish Four" is a discredited mechanical investing technique that, like the Dogs of the Dow, attempts to select the member stocks of the Dow Jones Industrial Average that will outperform the average in the near future....
strategy is a strategy popularized on the investing website
The Motley Fool. This strategy dictates that the investor take the 30 Dow Jones Industrial stocks and divide the dividend yield of each one by the square root of the stock price...
Dividend Yield ÷ Stock Price
.5
Take the 5 stocks with the highest ratio and drop the stock with the highest ratio. The investor is then to invest in the last 4 stocks called the "Foolish Four". This strategy has returned 24.5% annually from 1975 - 1999 which would make $10,000 into $2.4 million.