High Dividend Stocks - Double Digit Returns



High dividend stocks can boost portfolio returns by combining 6-15% dividend yields with capital appreciation to boot. There are several considerations in pursuing the right companies.



The Beauty of High Dividend Stocks

Stocks with high dividend yields are attractive from the standpoint that they are providing meaningful income when the broad market is flat, they can buffer against a downturn due to the yield they're throwing off, and best of all, during a market upturn, they continue to provide yield and capital appreciation simultaneously. As economic conditions improve, these outfits are more likely to actually increase dividends, especially if forced to do so depending on how they're structured.

Stock dividends are currently taxed at a lower rate than capital gains. As such, many investors view income from payouts as more attractive than chasing growth companies that are prone to wild price swings. If holding shares in a self-directed IRA account, the beauty of compound returns takes over. Dividends accrue tax-free in these accounts and investors can continue to reinvest the dividends as they build each quarter without regard to taxes on holdings within the account.

Risks of High Dividend Stocks

Stocks with an abnormally high yield may be explained by a number of factors. In some cases, they may be in an unattractive or risky industry like bit tobacco. While litigation and government intervention is seemingly just around the corner, many of the world's largest tobacco companies have managed to stay in business and deliver stellar returns to shareholders due to the massive dividends they issue each quarter. The massive amount of cash flow they generate has made them an excellent choice for the dividend investor. However, the yields are high because the share prices are often depressed over concerns of particular court rulings, taxes imposed on cigarettes and other factors.

Additionally, some stocks have an "unnaturally" high dividend payout. This could be the result of a recent market decline where investors have priced in a dividend cut. Take the Financials through the 2008-2009 financial crisis. Based on the trailing dividend yields, many large banks and insurers were showing yields well in excess of 20%. But we all know any investment with a 20% return is anything but guaranteed. The market had correctly priced in the fact that eventually, these companies would need to cut their dividends in order to preserve cash given all the loans that went bad from sub-prime and even alt-A mortgages.

How to Find the Best High Dividend Stocks

There's no hard and fast rule, but there are some key considerations. It's important to consider the context of the current dividend yield. If the share price is steady or increasing over recent history, this is a good sign that there is market confidence in the ability to continue to pay a sustained dividend. Recent dividend increases are especially attractive since management of a company is unwilling to announce an increase if there is risk that they'll need to subsequently cut it again in the near future.

Are the dividend payouts erratic or steady? In some cases, you can even find High Yield ETFs that pay steady dividends monthly. Now that's predictable!

For investors comfortable reviewing financial statements, it's also good to consider a company's cash flow. It's unlikely that a corporation will continue to fund a dividend that exceeds the cash flow it's generating each quarter. In fact, many analysts like to see at least 2 times the payout in the cash flow. Investors must also take into account where we are in a current economic cycle, as there are many companies that whether downturns in the economy with a cash buffer but maintain the same cashflow nonetheless.

Whatever your criteria, it's important to know that there are literally hundreds of quality high dividend stocks that make for a great addition to the portfolio for patient investors.

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