What is a High Dividend Yield?
A high dividend yield refers to a financial metric that shows the percentage return on investment through dividend payments relative to a company's stock price. It is calculated by dividing the annual dividends paid per share by the current market price per share, typically expressed as a percentage.
Understanding Dividend Yield
For example, if a company pays annual dividends of $2 per share and its stock is currently priced at $40, the dividend yield would be 5% (calculated as $2 / $40). Investors often look for stocks with high dividend yields as a way to generate income, especially in low-interest-rate environments.
What is Considered High?
While the definition of a 'high' dividend yield can vary, yields above 4% to 6% are generally viewed as attractive in comparison to traditional investment options. However, an unusually high yield may also signal underlying issues with the company, such as declining stock prices or concerns about financial stability.
Risks Involved
Investing based on dividend yield should be approached cautiously. Investors need to analyze the sustainability of the dividend, the financial health of the company, and economic conditions. A high yield does not guarantee shareholder returns if the company's fundamentals do not support it.