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There are key insights into high-yield dividend stocks you wish you'd known decades ago.
It may be something readers already know. But I was surprised when I did a survey among friends. Most investors (and some with portfolios worth hundreds of thousands of pounds) didn't get it.
Postponement FTSE 100 either FTSE 250 Companies paying low (or no) returns today could mean missing out on top performers in a portfolio.
1. High performance is not better than low performance
Focusing solely on picking high-yield dividend stocks could be a way to commit to long-term wealth.
That is not to say that British companies paying high returns are poorly managed. The thing is, high-yield dividend stocks aren't necessarily the automatic wealth generators that many people think they are.
While 98% of FTSE 100 companies pay dividends, there are two that do not. ocadoand Rolls-Royce.
Rolls-Royce shareholders have enjoyed a 173% price gain in the last 12 months. The British engineering company suspended its dividend around the pandemic in 2020.
The general sentiment among City analysts is that it has been more important for Rolls-Royce to use its excess cash to stabilize its business and return to profit.
The point is that companies with low returns are not inherently worse than companies with higher payouts.
In fact, about half of all stocks on the market don't pay any dividends.
2. Returns rise when stock prices fall
Anyone reading and knowing this should feel free to skip this part. But no one explained this to me for years.
When stock prices fall, dividend yields rise. This is not because the company has suddenly decided to pay higher dividends to investors. It's just math.
Dividend yields are calculated as percentage. So when are stock prices lowest? The dividend per share is a higher percentage of that lower share price.
Suppose a company pays shareholders dividends of 10 pence for each share they own. Today the company trades at 200 pence per share. That is equivalent to a dividend yield of 5%.
If the share price fell by half, to 100 pence per share? The dividend yield would jump to 10%. I still get paid 10p for every share I hold. But the pound value of my entire holding has just fallen by 50%.
If a company performs well, its stock price will increase. And its dividend yield will fall at the same time.
3. High returns may not last
What has made me the most money in my investments has been focusing on sustainable dividends. growth.
It must be taken into account that the average dividend yield paid by FTSE 100 companies over the last 25 years was only 3.8%.
Carry BAE Systems For example. In the last 20 years, the company has not spent much on paying dividends. Shares that were worth 200p in 2004 are now worth 6 times as much. It has survived and thrived. And it has improved its dividend per share for decades.
If I had been smart and bought 10,000 shares at that time, I would have multiplied my original holding six-fold, while increasing my annual dividends from £370 a year (1.8% yield) to £2,810 a year (1.8% yield). 2.3%).
My money would be working a lot harder.
Admitting what you don't know can be embarrassing. But, in most cases, it is a good step towards becoming richer.