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There are shares with dividend yields above 10%. Can you trust such shares? Would you buy them? Some examples:

  • TUI (DE000TUAG000) - 14,83%
  • Helmerich & Payne (US4234521015) - 14,15%
  • AGNC Investment (US00123Q1040) - 12,14%
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  • There are no guarantees, so it is not clear what you mean by trust. For example (a very painful one for me), SDRL. Shortly before they cut their (nice) dividend in 2014 they said if was sustainable for some time. Nice thanksgiving gift. Big surprise for everybody.
    – copper.hat
    Aug 27, 2020 at 18:11

4 Answers 4

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I only looked at TUI, but I imagine this is valid for the others as well.

What does "dividend yield" mean? It is the last dividend payed in relation to the current share price. Comparing with this number is not really useful: the last TUI dividend was 0,54 €. The current price is about 3,60 €, while the price in February was around 10 €. If we relate the last dividend to the current price, we indeed get a number of about 15%. If we took the price at the time of the dividend payment, we are at 5.4%, which is much more realistic.

Since then, the situation for TUI has changed fundamentally, and I would expect that the next dividend will be much lower.

Side note: For me, the amount of dividend doesn't say anything. Because the dividend is what the company pays to the shareholders, reducing their liquidity and their net worth. So the amount basically means nothing. Other people have other opinions on this, however.

Edit to the last paragraph: To clarify: Dividends increase your liquidity, but don't change your net worth: what you get paid out per share is reduced on the share price. So in a way it is a zero-sum game.

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  • Thanks! I understand for TUI. But look also at AGNC. They have a constant high dividend since many years.
    – askolotl
    Aug 26, 2020 at 12:15
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    @askolotl Nevertheless, their share price has fallen, and the dividend is calculated the same way as described above. Whether the share price will return to its old value or not, is unknown.
    – glglgl
    Aug 26, 2020 at 12:19
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    @askolotl , consider a bankrupt company- their last dividend was 1 Euro, and now their share value is 0.1 cent. 1/.001 = 100000% !!? Would this imply they are a good investment?
    – Aganju
    Aug 26, 2020 at 17:23
  • Agreed. I usually avoid dividend shares. They are often overpriced due to the fact that the dividend implicitly make them attractive to funds, retirement portfolios and private equity companies.
    – Stian
    Aug 27, 2020 at 9:10
  • @StianYttervik Yes, but they're often lower volatility and lower risk investments - it just depends what you want in your portfolio. Dividend reinvestment plans can also really make them attractive.
    – J...
    Aug 27, 2020 at 14:37
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The high dividend yields you listed are trailing dividend yields. Trailing dividend yields represent dividends of the past relative to the stock prices of the present.

The past is the past, so what you should be thinking about is the forward dividend yield, rather than the trailing dividend yield. Forward dividend yields represent future dividends relative to the stock prices of the present.

A stock with a 20% trailing dividend yield does not necessarily have a 20% forward dividend yield. If the stock stops paying dividends in the future, the future dividend yield will be 0%. Trailing dividend yield mixes past information (a past dividend) with current information (the current stock price), which may produce a rather useless picture when stock prices move substantially after the dividend is paid, or when future dividend amounts are substantially different from those of the past. When considering dividend yields, it is the forward dividend yields that matter more.

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High dividend yield occurs when share price drops. A very high yield is often a signal that a company's financials are problematic. If this is the case and the dividend is unsustainable, it can be cut, leading to further deterioration of share price.

In order to determine whether it's a good investment or an accident waiting to happen, you'd have to be capable of some fundamental analysis (I'm not) and evaluate the quality of management, the strength of the financials and project what company performance might be going forward and if the dividend can be sustained.

Chasing high yield has often been the path to ruin for those whose only criterion for buying was a fat dividend.

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Acme Corporation

A dividend stock with a high and stable dividend yield! The perfect stock for risk-averse dividend investors.

Year 2020

  • Dividends: $5
  • Stock price on December 31: $25
  • Dividend yield: 20%

Year 2021

  • Dividends: $0.5
  • Stock price on December 31: $2.5
  • Dividend yield: 20%

Year 2022

  • Dividends: $0.05
  • Stock price on December 31: $0.25
  • Dividend yield: 20%

XYZ Widget Company

An dividend yield of 1% in 2020 turns into a highly attractive dividend yield of 1,000,000% by 2021! What a great dividend stock!

Year 2020

  • Dividends: $10
  • Stock price on December 31: $1000
  • Dividend yield: 1%

Year 2021

  • Dividends: $10
  • Stock price on December 31: $0.001
  • Dividend yield: 1,000,000%

Year 2022

  • Dividends: $0
  • Stock price on December 31: $0 (bankrupt)
  • Dividend yield: 0%
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