Trade tensions, rising Fed interest rates, and a lack of confidence have all contributed to major slides, corrections, and generally unpredictable stock price patterns this year.
The average investor looking for long term returns could easily be discouraged from stocks during a time like now. However, there are ways to mitigate volatility, such as investing in high dividend yield stocks.
What Classifies as a High Dividend Yield?
Today, the average dividend yield across all major indexes is around 2%. This number can fluctuate daily with adjustments from individual stocks.
Anything beyond 2% could be considered above average, but a dividend yield would need to be closer to 4% before it could be considered ‘high’.
To put this in perspective:
- Microsoft (NASDAQ: MSFT) has a yield of 1.81%, so it’s close to the market average.
- Coca-Cola (NYSE: KO) has a yield of 3.28%, so it’s better than average, but not quite considered to be high.
- BP (NYSE: BP) has a yield of 6.44%, so it would be considered high by most investors, advisors, and analysts.
Dividend Yields are Better for Income
For retiree investors and anyone that derives their primary income from stock dividends, a high yield will be crucial.
Yields can protect against volatility. BP is a great example. Stock price has fallen -16.59% in three months, yet BP still has one of the highest dividends out of all the large and mature companies.
Sometimes a High Dividend is Too Good to be True
As with all aspects of the stock market, things are a little more complicated than just the numbers on the surface. A high dividend doesn’t automatically represent an investment that mitigates volatility. High dividend payouts are sometimes used by companies with low cashflow that want to attract investors in the short term. Due diligence and research are always necessary.
Generally, a mature company with a high dividend is safer than a relatively young company with a similar dividend. Mature companies with well-established business models are more likely to have free flow cash that can be returned to investors.
A high dividend can provide a type of safety net in times of volatility, but stock picks should be made carefully. Take all signals into account, including corporate governance, fiscal responsibility, and current industry conditions.
High volatility looks set-in for the market in 2018, but, with the new year around the corner, it’s uncertain which way the current market will turn.
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