SNAPSHOT: Investing in High-Yield Stocks
How It Works:
Rather than comparing stock prices and trying to anticipate which ones have potential for growth, investing in high-yield stocks means looking to dividends, rather than price increases, to make your money grow.
- Cash in Hand: With a growth stock, you can’t cash in until you sell—and pay capital gains tax. But when your payoff comes from dividends, that’s money you can use right away to pay your bills, invest in other instruments, or increase your holding of stock by reinvesting.
- Greater Stability: High-yield stocks generally are more stable than low-yield ones.
- Protection in Bad Times: If the price of your stock falls, the fact that your earnings are paid in cash will preserve at least some of your profits.
- Earlier Taxes: Dividends are income, which is taxed in the year it is earned. If you buy and hold a stock that pays little or no dividends but increases in value, you won’t have to pay taxes until the stock is sold.
- Less Growth: High-yield stock may see less appreciation in underlying share value than pure growth stock. However, if you want to grow your investment, you can do so by automatically investing your dividends in more stock.
- Some Study Required: You will have to spend at least a little time learning what category of stock (or mutual fund) makes most sense to you, and keeping an eye on the stock and/or its industry.
Who Should Invest:
Some high-yield companies probably belong in most stock portfolios—keeping in mind that risks tend to be higher than with the most established growth stocks. Receiving dividend income should be particularly appealing to those contemplating retirement—or anyone else who needs ongoing income.