How to buy high yielding dividend stocks

Key Points

• High yielding dividend stocks pay a relatively higher yield than most dividend stocks.
• These tend to be stocks that pay high single-digit to double-digit percentage yields.
• A high dividend yield is relative to your needs and what you compare it to.
  

You've heard of dividend stocks and how they can provide a small income for holding them. They tend to be suitable for conservative investors, often retirees seeking an income stream from their investments. However, not all dividend stocks are conservative. 

If you're willing to take on more risk for more reward, you should check out high-yield dividend stocks. High-yield dividend stocks could be called high-risk high-dividend stocks. Risk is proportionate to reward in the stock market. And these high-paying stocks carry a hefty dividend and a hefty amount of risk.  

What are high-yielding dividend stocks?

If you're wondering how to buy high yield dividend stocks, first and foremost, it's prudent to familiarize yourself with stock dividends and know the answer to "What are dividends?". Use the MarketBeat dividends screener to find dividend stocks to understand the range for low to high dividends. The MarketBeat dividend calculator can help calculate the dividend yield for stocks. Once you get familiarized, then it's time to check out high-yielding dividend stocks.  

High-yielding dividend stocks pay a relatively higher yield than most dividend stocks. These tend to be stocks that pay high single-digit to double-digit percentage yields.

They can be lower-priced stocks since a low underlying stock price numerator over the dividend equates to a higher yield than a higher-priced stock. For example, a $1 dividend from a $10 stock provides a 10% dividend yield, while the same $1 dividend from a $100 stock only provides a 1% dividend yield. 

Percentage cuts both ways. It takes much more selling for a $100 stock to fall 10% compared to a $10 stock falling 10%. A $10 stock is selling at $10 for a reason instead of selling for $100. There are likely issues with the underlying business or sector that have kept the stock price depressed. It's these underlying issues that are the main risk culprits. High-yield dividend stocks always face the risk of a dividend cut or elimination or the underlying stock falling further in value.

Advantages and risks of high-yield dividend stocks

The potential benefits of high-yield dividend stocks are clear. When stock prices move higher, you can reap rewards from the compounded gains in share price plus the yield placed on top. For example, a 10% yielding stock that raises its dividend to 12%, and then rises another 14% in price, is now yielding 14%.

There's also an income stream from the dividends paid every quarter or annual cycle, depending on the company's payout schedules, which can help you reach your overall financial plan and goals for retirement.

However, as attractive as this strategy may sound, it comes with a few risks for those wondering how to invest in high yield dividend stocks. One of the main risks with high-yield dividend stocks is that companies with high yields may struggle to sustain that level of payout over the long term, which could lead to a dividend cut or elimination. This could not only result in a loss of income for you but also cause the stock price to drop.

Additionally, the best high yielding dividend stocks are often found in sectors that are experiencing financial difficulties. For example, a company in the oil and gas sector may offer a high yield due to lower oil prices, which could be hard to sustain.

How to find the highest-yielding dividend stocks

Finding the highest-yield dividend stocks by hand can be very time-consuming. It helps to use a screener tool like the MarketBeat high-yield dividend stocks screener tool. This tool takes the legwork out of hours and hours of manual searching. The screener allows you to select specific variables, and it will instantly scour the stock market for the best high-yielding dividend stocks. 

Here are some of the basic steps to effectively using this tool to find the best yield dividend stocks that suit your investing profile and risk tolerance. Remember that a screener can do most of the leg work in finding the most worthy high-paying stocks to fit the criteria, but you must research the underlying company to assess the risks better. 

Step 1: Access the MarketBeat high-yield dividend stocks screener. 

You can go to the primary screener tool provided by MarketBeat to find high-yield dividend stocks. This page lists the highest dividend yield stocks by the filter. The resulting list is organized by heading tabs in order. Remember that clicking any headings will invert the list in the opposite order by value or alphabetically. For example, the list defaults to showing the highest to lowest Dividend Yield stocks. But clicking the Dividend Yield tab again will invert the column to show the lowest- to highest-paying dividend yield stocks. Here's an explanation of each column:

• Company: This column shows the company's name, logo, and stock symbol.
• Current price: This column shows the stock's most current or last traded price.
• Dividend yield: This is the annualized percentage of the dividend divided by the current stock price. 
• Annual payout: This is the total dollar amount paid for a year's worth of dividend payments.
• Payout ratio: The dividend payout ratio is the ratio of the company's earnings paid out in dividends.
• Three-year dividend yield: This is the average annual dividend yield for the stock over the prior three years. 
• Ex-dividend date: As the name says, it's the first business day the stock trades without the rights to the dividend distribution.
• Indicator(s): Additional details refer to material actions and events about the company's stock price, news, financials and dividends.

Step 2: Select your preferred dividend yield percentage.

Obviously, if you’re looking for high-yield dividend stocks, the higher the better, but remember to factor in risk as well. For example, a stock with a 10% yield may seem appealing, but you may be able to find a stock with a 7% yield that carries much less risk. 

Step 3: Choose your filters.

You can opt for the default filters or select specifics among the four filters. Here are the free access filters.

• Country: This is where you can select the country where the stocks are traded. You can include the USA, Canada, United Kingdom, Europe, or Australia. The default USA selection includes stocks traded on the NYSE and NASDAQ exchanges.
• Sector: You can specify which sectors you wish to find the dividend stocks in. The default is set to "all sectors." If you want to narrow your choices to one or a handful of sectors, you can check off the ones you want, ranging from aerospace to utilities. 
• Market cap: You can select the type of market capitalization you want for high-yield dividend stocks. The default is set to "all market caps," but the choice to narrow your search is yours. A large-cap stock has over $10 billion in market capitalization, which is the stock price times outstanding shares. It implies a stock with a higher price and liquidity. Large caps tend to be blue chip companies which tend to be less volatile, but the higher prices result in smaller dividends. Small-cap stocks have a market capitalization of less than $2 billion and tend to be more obscure names with much more volatility risk and potentially higher dividends. Liquidity can be thin on these stocks, resulting in more slippage costs; the spread between the bid and ask may be higher.
• Type: The default is set to "stocks and ETFs," but you can select just stocks or just exchange-traded-funds (ETFs) according to your preference. Some ETFs have management fees or management expense ratios (MER) that can affect the dividend yield, especially over time. Passive ETFs carry smaller expense ratios.  

The final three filters, including MarketRank™ media sentiment and analyst consensus, require an All-Access subscription.        

Step 4: Research the results.

The results are produced instantaneously, so research the stocks to find the right candidates for your investment profile. Analyze financial metrics such as payout ratio and debt-to-equity ratio. A low payout ratio indicates that there's enough income left over after covering its annual or semi-annual dividend payments, meaning it can cover its expenses while maintaining high yields; strong cash flows are key here.

There are various tools on MarketBeat to assist you in attaining a better understanding of business operations, market sentiment and financial metrics. It pays to review the latest earnings report, news and any research reports to gauge how the company makes profits and its dividend history. 

Strategies for buying high-yield dividend stocks 

To maximize your returns and manage your risk, diversification is key. Aim to include a mix of stocks across multiple sectors with different market caps. Since dividend payments aren't contractual obligations, there is no guarantee that companies will consistently make the payment year after year regardless of their financial performance and other circumstances; owning stocks from various industries can help cut down certain risks while bringing in higher yields.

When entering the high-yield dividend stock market, keep your expectations realistic regarding returns on investment— you might see serious fluctuations in values, especially if stock prices depend entirely on underlying business success or external factors. However, high-yield dividend stocks can offer long-term income streams and potentially higher total returns than lower-yield stocks or non-dividend paying stocks.

Consider the company's financial health and dividend history; a consistent track record of increasing or maintaining dividends can indicate a stable company with a strong cash flow. However, don't solely rely on past performance as an indicator of future success.

Due to the market characteristics of high risk high dividend stocks, consider adopting a dollar-cost averaging approach — investing in high dividends at regular intervals. This can average out stock costs and provide a margin of protection against volatility while increasing your holdings with each purchase. You may also want to consider timing purchases around ex-dividend dates for maximum yield gains after vulnerable market pullbacks; taking advantage of potential lower entry points following selloffs is one way you could make more money from reinvesting your dividends over time.

How to determine whether a dividend stock is high yielding 

A high dividend yield is relative to your needs and what you compare it to. A 5% dividend yield may be considered high compared to a 1.25% dividend yield or during a period of low interest rates. You can also compare the weighted average dividend yield for a benchmark index like the S&P 500 or look at the historical dividend yields for the index. The S&P 500 average dividend yield has ranged between 1.22% and 3.23% since 2000. Dividend yields above that range can fall into the high-yield dividend range. 

Long-term profitability 

The safety of a dividend depends on its long-term profitability. While some companies pay a dividend despite losses, these companies are the most likely to cut or eliminate dividends. This is why Dividend Aristocrats have the reputation of long-term profitability backed by decades of consistent and growing dividends. For this stability, the yields tend to be relatively low, proportional to the risk.

Debt considerations 

Debt matters mostly with companies that are experiencing losses while still distributing dividends. A high level of debt can put dividends at risk, especially when interest rates are climbing. When the cost of financing debt can't be covered sufficiently by its earnings, then the dividend could be at risk of being cut or eliminated. 

Sector trends

The stock market tends to favor specific sectors depending on the macroeconomic climate. Owning dividend stocks in a vital sector can improve the underlying stock price and dampen the dividend. Stocks in weaker sectors tend to have depressed prices, resulting in a higher dividend rate. It's essential to remember that you may need to choose between stock appreciation or income when investing in dividend stocks. High-yield dividend stocks are usually in less favored or weaker sectors, which makes the dividend higher due to relatively weaker sector sentiment. 

When does a stock yield a too-high dividend? 

An exceptionally high dividend in the double to triple digits is sometimes a good indication that there is a problem with the underlying company. Just doing the math, the underlying stock price may be very cheap, causing the dividend to appear abnormally high. There are usually bearish reasons for the stock price being overly cheap, and they could stem from accounting irregularities to regulatory investigations to potential bankruptcy. 

For this reason, it's critical to also research any recent news or articles on the stock. These can be found on MarketBeat by simply entering the stock symbol in the "Find Now" search bar. 

When to consider high-yield dividend stocks

While there are exceptions, you should consider high-yield dividend stocks if you're seeking to generate income from your investments. High dividends may appeal to both conservative and aggressive investors. For the former, it means potentially higher returns while preserving capital. And if you're aggressive and looking for high returns, you may buy stocks when others sell. However, be sure to analyze the risks carefully before investing in these stocks, since they can be more volatile and have company-specific risks.

These specific high-yield dividend stocks can be a hedge against inflation

As you can see, high-yield dividend stocks can provide income-oriented investors with additional income. This is particularly true when inflation exceeds the Federal Reserve's preferred 2% target. 

One specific type of high-yield dividend stock to consider in this scenario is a real estate investment trust (REIT). 

A real estate investment trust (REIT) is a company that owns and manages income-generating commercial or residential real estate assets like office buildings, shopping centers, hotels, malls, warehouses and apartments. REITs are very useful for collecting consistent dividends. It enables investors to partake in the benefits of owning property without managing day-to-day functions. 

REITs are traded on the stock market and must distribute at least 90% of their taxable income to shareholders through dividends. The timing of the dividend distributions can vary from a monthly to a quarterly schedule, depending on the particular REIT. 

For investors who want more monthly income, REITs can be a solid alternative to owning a regular dividend stock. REITs can be some of the best-yield dividend stocks with low relative risks. REITs also tend to have higher dividend yields because they distribute most of their income to shareholders. 

FAQs

Here are some common frequently asked questions that may be on your mind. 

Which stocks yield the highest dividend?

The highest dividends come from the riskiest stocks. These high-paying stocks may have underlying problems like financial irregularities, a weakening business model on the verge of a dividend cut, or eliminating its dividend. It's hard to find blue chip companies offering very high dividends since their seasoned businesses provide more security and low risk, and the dividend payouts are also lower. REITs consistently offer high dividend yields because they distribute 90% of their income to shareholders. The distribution frequency can vary by individual REIT from monthly to quarterly or annually. 

Is it worth investing in high-yield dividend stocks? 

High-yield dividend stocks can be higher risk and require proper allocation in your investment portfolio. It's never prudent to put all your eggs into one basket. A diversified portfolio should spread the risk around through different assets and risk levels that meet each individual's financial goals and investor profile.

Is it good to collect dividends?

It can be good to collect dividends if seeking income for holding stocks. Dividends provide an additional source of income for investors keeping dividend-paying stocks in their portfolios. The dividends can be collected and withdrawn from the investment account to be used as income or reinvested into more stock for a compounding effect. Many companies offer dividend reinvestment programs (DRIP) for this purpose. If you're seeking more steady dividends as a source of income, consider looking for the best monthly dividend stocks and ETFs.