Question

Is a high dividend yield a good thing or a bad thing for investors?

Answer 1

Solution) High dividend yield is both good and bad for the investors. It is taken positively by the investors because of the following benefits:

a) Regular Income: High yield stocks generally pay dividends to their shareholders on a regular basis. This leads to a regular stream of income for the shareholders over the investment horizon.

b) Better returns: With the dividends, the return for the shareholders by holding the stock will increase.

c) Volatility: The companies with high dividend yield are less prone to economic cycles and hence their earnings are considered as less volatile.

Key risks associated with the high dividend yield stocks include:

a) Higher taxes: The high dividends would increase the taxable income for investors which falls in the higher tax bracket. Thus, these investors will not prefer high dividend yield stocks.

b) Low retained earnings: High dividend-paying stocks have lower retained earnings which have an impact on the company's long-term growth as the company would have less capital for funding the future's projects. Also, with low retained earnings, the company will need to raise external capital to fund future projects.

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