Hey everyone,
It's tempting to sort a list of dividend stocks by whichever pays the highest percentage and call it a day. That's usually a mistake, and here's why.
What yield actually measures
Dividend yield is just the annual dividend payment divided by the current share price, expressed as a percentage. It tells you the income you're getting right now, relative to what you paid — nothing more. It says nothing about whether that payment is safe, growing, or about to be cut.
Why a high yield can be a warning sign
Yield rises two ways: the dividend goes up, or the stock price goes down. A stock whose price has fallen hard because the business is struggling will show an unusually high yield — right up until the company decides it can no longer afford the payment and cuts it. This is sometimes called a "yield trap": a number that looks generous but is actually flagging risk, not opportunity.
What dividend growth measures instead
Dividend growth tracks how consistently and how much a company has increased its payment over time — often measured in years of consecutive increases. A company that's raised its dividend every year for decades is telling you something meaningful about its underlying financial discipline and stability, regardless of what the current yield happens to be.
A lower yield today with a strong history of consistent growth often ends up paying more in total income over a long holding period than a high yield that stalls out or gets cut.
What to actually check
- How many consecutive years has the dividend been raised, and by how much each time?
- What percentage of profit is being paid out as dividends (the payout ratio)? A payout ratio consistently above 100% is a red flag — the company is paying out more than it earns.
- Is the yield high because the dividend is generous, or because the stock price has dropped?
Checking a company's actual financial health before trusting its dividend is exactly what our 4 Ratios course teaches you to do. And once you understand how the payment itself works mechanically, see our piece on reinvesting dividends automatically.
More soon,
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