When it comes to stock market investing, shares can be broken down into many different categories. One of the categories new investors typically hear quite a bit about is the so-called dividend yield stocks. Here’s what all investors should know about dividend yield stocks and their place in a balanced portfolio.
What Is a Dividend Yield Stock?
Essentially, a dividend yield stock is a stock selected for either the size or the stability of its dividend. A high dividend yield can significantly increase a stock’s total return, sometimes allowing investors to beat the overall market. A stock that grows 8 percent in a year and offers a 5 percent dividend yield, for example, would have a total return of 13 percent. As such, stocks with high dividend yields can be among the best elements in an investment portfolio.
In addition to offering a reasonably good yield, a stock selected for this purpose should also have a stable history of paying dividends. A stock that has only paid dividends for a year or two may have a high yield that is unsustainable, making it a poor candidate for long-term holding. Stocks that have paid dividends reliably for years, on the other hand, are unlikely to stop or significantly cut their payments.
Dividend Growth vs. Dividend Yield Stocks
A distinction that can be confusing to investors is the difference between dividend growth and a dividend yield stock. While dividend yield stocks are selected for their current level of yield, dividend growth shares are selected for their long histories of raising their dividends over time. In the latter case, investors buy shares for the promise of larger dividends in the future. It should be noted that a stock that performs well as a dividend yield stock can also be a dividend growth stock under the right circumstances.
What Role Can Dividend Yield Stocks Play in a Portfolio?
Aside from generating higher overall returns, dividend yield stocks can be an important source of cash flow from a stock portfolio. These stocks give investors the opportunity to generate income without having to sell off their shares. As a result, they are good options for retirees and other investors who need a reliable source of liquid cash. Good dividend yield stocks can also act as a hedge against losses during tough economic times, as dividends can help to offset reductions in actual share value.