Should I Buy Stocks Because of Their High Dividend Yield?

Many people follow stocks or own stocks that pay good dividends, which can be pretty compelling. Of course, having cash in your pocket is always a good thing. 

In my opinion, a dividend alone is not enough to convince me to buy a stock. A little bit of caution is required. A stock could have a high dividend because the price has dropped significantly. In the last nine and a half months, most stocks have dropped, and if they haven’t adjusted their dividends yet, the dividend yield is going to look higher. Moreover, if you go into a recession and companies have lower earnings, they’ll probably have to cut their dividends. So something that might have strong earnings or a strong dividend now might have a much lower dividend the next time they declare one. As a result, you have to be careful.

We don’t follow that strategy here at Yardley Wealth Management because it excludes many companies that have had excellent share appreciation, like most of the tech stocks and Berkshire Hathaway, and other companies that prefer not to pay out dividends. But it is one that some people successfully employ. So I would say if you do, be aware of the drawbacks.