---
title: "Should You Invest in the Highest Dividend Paying Stocks?"
description: "Stocks that pay dividends can be great to own. Before you chase the highest annual payout, learn more about how dividends may cost you!"
canonical_url: https://trendshare.org/how-to-invest/should-you-invest-in-the-highest-dividend-paying-stocks
markdown_url: https://trendshare.org/ai/should-you-invest-in-the-highest-dividend-paying-stocks.md
published: 2012-10-01
last_updated: 2020-11-08
content_license: https://trendshare.org/about/disclaimer
---
# Should You Invest in the Highest Dividend Paying Stocks?
Source: https://trendshare.org/how-to-invest/should-you-invest-in-the-highest-dividend-paying-stocks
Updated: 2020-11-08
A successful company—one which [earns real money every year](https://trendshare.org/how-to-invest/earnings-matter-most) has three options for that cash:
- Reinvest those earnings into the company to make new products and services, find more customers, build new stores or factories, or make the business more efficient
- Buy back its stock so that each remaining share owns more of the company (and more of next year's profits
Return money to shareholders in the form of dividends
## How Do Dividends Work?
Suppose you loan your best friend $1000 for a year at 5% interest. You
expect to get back your $1000 plus that 5%—another $50.
Now suppose you invest in your best friend's business. For every thousand
dollars of money invested, the business can make $50. At the end of a year, you
still have your $1000 invested in the business, and you have the $50 the
business made thanks to your investment. You own a part of the business and you
own a part of the profit from the business.
Dependable dividend stocks such as [Coca-Cola](/stocks/KO/view)
pay out handsomely every quarter. Even if the share price barely moves every
year, investors still make money from these dividend payments. Better yet, they
don't have to *sell* their shares to get that money. The check comes
every quarter.
This money gets paid to all shareholders, regardless of the number of shares
they own. A retired grandmother in Canada who owns one share of Coca-Cola gets
her dividend the same way a wealthy hedge fund manager who has a fifty million
dollar portfolio and lives on the beach in Costa Rica does. That's why dividend
investing is attractive: it's reliable.
[Not all companies pay dividends](https://trendshare.org/how-to-invest/why-do-some-companies-not-pay-dividends). Some companies make no profit, so they can't pay out anything
(without taking out a loan). Other companies pour all of their money back into
the company to grow faster. That's a reasonable choice. What works for one
business doesn't work for others.
Stocks that pay dividends pay, on average, about 2% of the value of the
stock every year. In other words, if the stock costs about $100, you'll get
about $2 every year. That's a 2% return on your investment, before taxes and
fees. (Once you take into account federal and state income taxes and inflation,
[a 2% annual return doesn't sound like much](https://trendshare.org/how-to-invest/what-is-a-good-annual-rate-of-return), does it?)
This number is also known as the [dividend yield](https://trendshare.org/how-to-invest/what-is-dividend-yield). A company with a share price of $10 and a $1 annual dividend has a
dividend yield of 10%. A company with a share price of $100 which pays out $1
per share every year has a dividend yield of 1%.
To determine whether any given stock pays a dividend, use a stock research
site such as like [Google Finance](https://www.google.com/finance)
or [Yahoo! Finance](https://finance.yahoo.com/). You should see a
dollar amount for latest dividend announced, annual amount paid, and current
yield. Check these dates; a stock may pay out one quarter and not the next.
## Should You Invest in the Highest Dividend Paying Stocks?
High dividend paying stocks may have rates of 5%, 10%, or more. Why so
high?
It could be that the share prices have plummeted, usually because investors
aren't certain that the business will continue to make that kind of money every
year. Alternately, it could be that the company has raised its dividend in
hopes of attracting more investors.
The worst case scenario is a penny stock with a huge dividend
yield—low price, comparatively high dividend. Remember that the price you
pay for a stock and the growth of the business over time govern how much money
you make on that stock. Also keep in mind that you will rarely see [penny stocks](https://trendshare.org/how-to-invest/should-you-buy-penny-stocks) pay dividends! (There's no
shortcut to invest little money with high returns. Sorry.)
A *high dividend paying stock* is paying more than the average
dividend rate ompanies that pay high dividends may do so because they're good
companies... or because they want to attract investors to drive up the share
price. It may be a sign that the share price has gone down, dramatically down,
recently. (Sometimes this means [the stock is on sale](https://trendshare.org/how-to-invest/when-stocks-go-on-sale)! Great! Other times it means that the company is in trouble.) You
can't know this just by looking at the share price and the high dividend
amount; you have to understand the company's business and its current
financials.
Keep in mind that a company must *choose* to pay a dividend. Just
because it paid one last quarter doesn't necessarily mean that it will pay one
this quarter. As well, the *amount* paid may very. While a reliable
dividend stock like Coca-Cola will regularly raise the amount of its dividend
payments, not all companies do. A fluctuating business which paid $1 per share
last year may pay only $0.02 per share this year.
Are high dividend stocks a good investment? Not necessarily! Pay attention
to *how* they're paid. Do they pay them every year? Every quarter? Does
the company raise its payment amount on a regular schedule? The best dividend
paying stocks do this. Coca-Cola is a great example; Coca-Cola stock is a good
investment, though it's not always available at a great price! If you bought
Coca-Cola at a great price a couple of decades ago, you could make more from
dividends every year per share than you ever paid for the stock. (That's the
misleading part of dividend yield of stocks; it's always calculated relative to
the *current* price, not what you paid.)
## Should You Pursue a Dividend Income Portfolio?
Investing in stocks that pay dividends can be a good strategy, especially if
you want regular cash coming in reliably. Remember that word,
*reliable*.
If you want that reliable check quarter after quarter, making a dividend
income portfolio may be a good approach. Because the payout is automatic (at
least for a dependable dividend stock), you don't have to sell stocks whenever
you want the check.
Of course, a reliable dividend producer isn't going to give you 10% returns
a year. Figure 2%.
That means you need to work backwards from what you want to make every year
to see how much you need to invest to get that return.
In other words, if you want to make $500 a month in dividends, you'll need
to invest 50x that much money at a 2% dividend payout. That's $25,000.
Remember, though—you want $500 every month. That means you'll need
$25,000 worth of stock for every month in the year, so $300,000 worth of stocks
paying a 2% dividend yield will give you $6000 worth of dividends every
year.
To find the right portfolio that will pay you $500 mechanically every
month... that might be the place to look for a reputable, fee-only financial
planner to be your dividend stock advisor.
## Value Investing and Dividends
Companies that make money are good to own. Companies that pay dividends
quarter after quarter generally make money.
Reliability is more important than a high payout. Dividends aren't
guaranteed. A company that paid a huge amount of money last year but may not
pay it again this year isn't necessarily worth owning. Value investors pursue
great companies because great companies make money, whether they reinvest it or
pay it out.
Can the company even afford to pay out this year? How about next year? A
company that pays a huge dividend—especially one disproportionate to its
earnings and free cash flow is a warning sign. How does the company plan to
continue its payment strategy? Is this a temporary trick of accounting to draw
in incautious investors to inflate the stock price to artificial levels? Be
wary. Rely on reliability.
Dividends are great, and many great companies have good dividend stocks to
buy. Yet [value investing looks for underpriced stocks](https://trendshare.org/how-to-invest/what-is-value-investing). Sometimes they pay dividends. Sometimes they don't.
If you find a great company that gives you a check every quarter—and
if the price is right relative to the value—then you've found a true gem.
They may be rare, but they're out there for you to find.