It’s easy to chase high dividend stocks — and even easier to lose money on them if they fall. There’s a better way to find high dividend yields you can count on to make you money — which includes stocks like materials company Rio Tinto (RIO) and financials like Federal Agricultural Mortgage (AGM)plus M.D.C. Holdings (MDC).
All things held equal, when a stock falls the dividend yield rises. In other words, if you own a company with a massive yield What’s an investor looking for high dividend stocks to do then? Find stocks with market-beating yields and shares that at least keep pace with the market long term. That way you get a rich dividend that isn’t eroded by a faltering stock price.that’s rising, you’re likely losing money on the underlying stock. That’s not a successful long-term strategy. It’s actually a common way to lose money.
To help you find such opportunities, Investor’s Business Daily pinpoints high dividend stocks that yield at least 3%, which is 100% more than the Standard & Poor’s 500 (yielding roughly 1.5%). But, just as importantly, they have a stock price that at least keeps up with the market.
High Dividend Stocks: Math Distorts Reality
A rising dividend yield may simply be masking a money-losing stock. Math and the way dividend yields are calculated is why this happens. The formula for dividend yield is:
Dividend yield = Annual dividend/Stock share price
This is why chasing yield is often a bad idea when looking for high-dividend stocks. High yields are often a mathematical distortion of a declining stock.
Chasing Yield Can Cost You Money
In fact, 405 stocks in the S&P 500 paid a dividend going into 2020, says S&P Global Market Intelligence. Of those dividend-paying stocks, 167, or 40%, saw their shares fall enough during the year to wipe out the entire year’s dividend yield, or worse. And that’s in a good market for the S&P 500. Nearly two-thirds of dividend stocks dropped by more than their yield in a less bullish 2018. And in 2019, 9% of S&P 500 stocks that paid a dividend coming into the year are down more than that yield.