Investing In High Dividend Stocks

Yesterday, I met with a best friend who told me that now he has decided to learn more about the stock market and to invest in stocks that he is retired. One of the strategies he decided to pursue is to invest in high dividend yield stocks. I told him that was not a good idea, and continued to explain why. After giving my advice, it occurred to me that perhaps the help that I gave my best friend might be help that I might give others as well; hence I decided to get back to writing a blog, after almost three years of absence. First of all, before even investing in a high dividend stock, one has to evaluate the likelihood that management will continue paying the same rate of dividends, or for that matter will continue paying dividends at all. Look at the company’s payout ratio- what portion of the earnings are being paid out as dividends? If the payout ratio is increasing, reaching 100% or greater, there is a great likelihood dividends will be stopped or be reduced. After all, how can dividends be paid when the company is not making enough to pay them? I also told my friend that Nobel Prize winners Merton Miller and Franco Modigiliani showed that there is no correlation between high dividend paying stocks and high return on investment. And...

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