Dividend paying stocks are no safer, do not protect an investor better in a bearish market, and do not outperform non-dividend paying stocks. As a rule of thumb, most securities that pay over a 10% dividend are considered very risky. So, are high yield dividend paying stocks the best way to go, and what are the alternatives?
Martin Tillier states on NASDAQ.com that “at its core, a dividend is your share in the profits of a company you own.” Dividends are paid out quarterly. For example, a company paying a 1% annual quarterly dividend will pay 0.25% of the holdings value for each of the four quarters of the operating year.
High dividends do not always mean a security is risky, a perfect example is AT&T. AT&T is currently paying a 5% dividend, yet they are a large corporation that has low historic volatility and produces stable profits.
Many individuals believe that dividend paying stocks are a good alternative to bonds. However, high yield dividend paying stocks should not be used to replace bonds. Bonds provide a stable and secure source of income, effectively providing an investor security that a high yield dividend stock can not provide.
If you're considering investing in high yield dividend stocks, you may want to take a step back and consider diversifying your portfolio with a mix of domestic stocks, international stocks, bonds, and even futures contracts. Investing in companies that shell out extremely high dividends should be thoroughly checked out before you invest. On that note, you shouldn't feel the need to avoid high yield stocks all together, just be sure to balance out your holdings with a less risky investment.