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Does a High Yield Dividend stock such as 45% mean that it is not worth buying? How could a company have such a high dividend yield rate? One of the companies I invested in has a dividend yield that high, I am very confused how this happens?

Could someone explain to me how this is possible ?

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Does a High Yield Dividend stock such as 45% mean that it is not worth buying?

No - it just means that its recent dividends were 45% of its current price. It could mean that the price has tanked recently, inflating the average. If it paid out 4.5% previously but the stock is now worth 10% of its value at the time of the dividend, then its current dividend rate would be 45%. Whether it will continue to pay dividends at that rate, or whether its share price will go up (reducing the yield) is not known, so there's no way to say for certain if it's worth buying or not.

How could a company have such a high dividend yield rate?

Most likely it's because the share price has dropped dramatically, inflating the dividend rate. I don't know of any company that has enough spare cash to pay out half of its value in dividends.

  • Thank you for the reply, so does this mean if my stock value dropped drastically, the dividend yield increasing will eventually allow me to make my losses back? Could you show me a numerical example on how this would work? – Aurora Borealis Mar 20 '20 at 15:09
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    Well that assumes that dividends continue to be paid at that level, which is unlikely since dividends are discretionary. Most likely a persistent dramatic price drop would result in a drop (or cut) in dividends (since a price drop indicates an expected drop in future cash flow for the company). – D Stanley Mar 20 '20 at 15:14
  • @AuroraBorealis Quite the opposite, a drastically rising dividend yield signifies that future dividends will likely be much smaller. Say I buy a car that's 5% of my net worth and a year later that same car is 45% of my net worth. Do you think my next car will cost more or less than the previous one? Surely I can't afford a car that's 45% of my net worth just because I could afford it when it was 5% of my net worth, and so my next car will cost much less. – David Schwartz Mar 20 '20 at 19:14
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If a stock is showing a 45% dividend yield I would not expect that dividend to be paid out. It would likely indicate a drastic reduction in price and they have just not yet announced they will cut their dividend. A good dividend stock that I have been following, a utility company, is around 5% dividend yield right now and that is a strong dividend.

  • A utility company I have been following is around 8% dividend yield now, and the particular utility company produces electricity via hydropower and nuclear, so if electricity price increases in the future, the dividend will increase too. I don't consider 5% dividend strong in these market conditions. – juhist Mar 20 '20 at 15:30
  • @juhist Care to share what that one is? I would also like to see other stocks paying reliable dividends in excess of 5% if you have them. Not just a current dividend yield that will likely be cut. – user1723699 Mar 20 '20 at 19:39
  • Of course, it's Fortum in Finland. Fortum owns hydropower, nuclear power, and a stake of Uniper having more hydropower, nuclear, gas-fired capacity and unfortunately coal too. Current dividend yield is 8%, it may be temporarily cut due to the coronavirus crisis, but I'd say the dividend yield is pretty safe in the very long term even though it can be temporarily cut. Electricity is always needed and the average prices won't go down in the very long term. – juhist Mar 20 '20 at 20:03
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Does a High Yield Dividend stock such as 45% mean that it is not worth buying? How could a company have such a high dividend yield rate? One of the companies I invested in has a dividend yield that high, I am very confused how this happens?

Could someone explain to me how this is possible ?

Several reasons, not necessarily in the order of importance:

  • Firstly, it is possible that the dividend is calculated incorrectly. For example, it could be old "dividend per share" information, or old "share price" information. Stock splits can affect the share price, but the dividend information may not be adjusted to take into account splits. E.g. splitting a share into 5 will change 9% dividend yield to 45% dividend yield, seemingly, unless the dividend is adjusted too.

  • Secondly, it is possible that there is a major stock market crash that has left investors not believing in the future. For example, if the coronavirus pandemic was more lethal than it is now: leaving 3% living instead of leaving 3% dead. Then it could be very well possible that nobody is willing to buy a stock unless getting 45% dividend yield.

  • Thirdly, it is possible that the company is in trouble: the dividend will be cut severely in the near future.

  • Fourthly, it is possible that the company has sold much of its business via a cash transaction, and is distributing the cash as a one-time payment back to the investors.

The rule is, you won't find a stable 45% dividend yield.

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