Hey, I know this is all about CFA, but I’ve got a question. Jim Cramer is always going on and on about how great high dividend yields are, saying how you can make good money off of them. However, in the large majority of cases, that stock’s price will drop by an equivalent amount of the dividend, and you’ll be taxed a higher rate on dividends than a capital gain on that amount. Can anyone help clarify how that is a good deal?
You figured it out. It’s not! Unless you’re a firm believer of “one bird in the hand is worth two in the bush”
Or could it be because if the company is paying high dividends it is confident of it’s future prospects, that it a strong and profitable company otherwise they won’t be paying dividend, becoz companies don’t like to cut dividends or missed paying regular dividend, not a good market signal, management is confident, the asymmetrical info. I haven’t seen Cramer in a while though…
or for “very high” div yields if you intend to hold the stock to perpetuity - ie. you can ignore price changes. Provided the div yield > required return you’ve got a good deal.
You also need to look at how closely the payout ratio is to the firm’s profitability. Given most corporates will have a nasty 12-18m ahead of them, if the div. is subject to change when profitability drops, the yield may be expected to change in the near future, reducing the appeal of a lot of the ‘typical’ HDY stocks being kicked around by people who make a living out of claiming to know a lot about investment.
Don’t forget about DRIPs too
He’s talking about dividends as a component of total return. If you have a high-yield dividend portfolio you should be getting a higher, more stable, return - like a bond paying coupons, but possibly at an increasing rate.