1

All things being equal (for the sake of simplicity), should one give preference to either of two dividend stocks?

Company A: $5/share at 20% annual dividend yield.

Company B: $10/share at 20% annual dividend yield.

I would say with company A, you can buy more shares and have a higher potential for growth/loss as price fluctuations would be magnified in your original holdings--i.e., more volatile. Is this correct, or are there other factors we should consider?

  • 1
    I have put the P in preferred into lower case. Preferred stock is a known entity and will be relevant to your query and envisage a totally different answer. – DumbCoder Oct 28 '16 at 15:20
  • 2
    @DumbCoder I think that the title needs rephrasing as something like "Which dividend bearing stock should be preferred" to avoid ambiguity. – MD-Tech Oct 28 '16 at 15:39
  • 2
    All else being equal, the stock share at $5 per share is in the range of "penny stock" which makes it more susceptible to scam-like manipulation. This is a "risk" (and is not guaranteed to exist on any specific sub-$5 shares) that does not offer a higher reward unless you yourself are the scammer and can control the flow of a "pump and dump" or similar illegal manipulation. – user662852 Oct 28 '16 at 15:54
3

Don't ever quantify a stock's preference/performance just based on the dividend it is paying out

Volatility defined by movements in the the stock's price, affected by factors embedded in the stock e.g. the corporation, the business it is in, the economy, the management etc etc. Apple wasn't paying dividends but people were still buying into it. Same with Amazon, Berkshire, Google. These companies create value by investing their earnings back into their company and this is reflected in their share prices. Their earnings create more value in this way for the stockholders. The holding structures of these companies also help them in their motives.

Supposedly $100 invested in either stocks. For keeping things easy, you invested at the same time in both, single annual dividend and prices more or less remain constant.

Company A: $5/share at 20% annual dividend yield. Dividend = $20

Company B: $10/share at 20% annual dividend yield Dividend = $20

You receive the same dividend in both cases. Volatility willn't affect you unless you are trading, or the stock market tanks, or some very bad news comes out of either company or on the economy. Volatility in the long term averages out, except in specific outlier cases e.g. Lehman bankruptcy and the financial crash which are rare but do happen.

In general case the %price movements in both stocks would more or less follow the markets (not exactly though) except when relevant news for either corporations come out.

  • This is what I'm looking for. In addition, I realize the annual dividends are equivalent for the same investment amount. However, on company A, a price change will generate 2x profit/loss with respect to company B. That is the gist of my question... What other investment strategies/facets of the problem should I consider when evaluating these two stocks against each other? I believe you answered it nicely. – James Oct 28 '16 at 16:25
  • 1
    @TechMedicNYC a price change should be measured in %. Comparing $1 increase in a $5 stock and $1 increase in a $10 stock is unfair. – base64 Oct 28 '16 at 17:02
  • @TechMedicNYC, you're looking at all of these numbers from the wrong perspective. A price change does not generate profit. – quid Oct 28 '16 at 18:20
  • To illustrate why picking a cheaper stock isn't a strategy at all: consider that company B could just split it's shares in half - now you can get two shares for the old price of one (price of company A's). Or split in 4: now they're $2.50 each. But the value of the overall company hasn't changed. – Chris Oct 30 '16 at 22:49
1

A 20% dividend yield in most companies would make me very suspicious. Most dividend yields are in the 2-3% range right now and a 20% yield would make me worry that the company was in trouble, the stock price had crashed and the dividend was going to be cut, the company was going to go out of business or both.

  • Fair enough, but realize there are several real estate trusts with consistent dividend histories around 10%. – James Oct 28 '16 at 16:27
  • REITs are different in that they have to pay out all the FFO because of their tax status. – zeta-band Oct 28 '16 at 19:51
1

In the scenario you describe, the first thing I would look at would be liquidity. In other words, how easy is it to buy and sell shares. If the average daily volume of one share is low compared to the average daily volume of the other, then the more actively traded share would be the more attractive. Low volume shares will have larger bid-offer spreads than high volume shares, so if you need to get out of position quickly you will be at risk of being forced to take a lowball offer.

Having said that, it is important to understand that high yielding shares have high yields for a reason. Namely, the market does not think much of the company's prospects and that it is likely that a cut in the dividend is coming in the near future.

In general, the nominal price of a share is not important. If two companies have equal prospect, then the percentage movement in their share price will be about the same, so the net profit or loss you realise will be about the same.

1

Price doesn't mean anything. Price is simply total value (market capitalization) divided by number of shares.

Make sure you consider historical dividends when hunting for big yields. It's very possible that the data you're pulling is only the annualized yield on the most recent dividend payment.

Typically dividends are declared in dollar terms. The total amount of the dividend to be issued is then divided by the number of shares and paid out. Companies rarely (probably never but rarely to avoid the peanut gallery comments about the one company that does this) decide dividend payments based on some proportion of the stock price.

Between company A and company B paying approximately the same historical yield, I'd look at both companies to make sure neither is circling the tank. If both look strong, I'd probably buy a bit of both. If one looks terrible buy the other one. Don't pick based on the price.

-1

Lets break this question down into several smaller ones:

  1. Should you buy stocks with a 20% dividend yield or more? We use Equities Lab for the analysis, assume quarterly rebalance, restrict ourself to vaguely liquid US Equities and ADR's only, and include delisted stocks if they would have been bought at the time. Also, these performances include dividend payments, assuming said payments were reinvested at the time they were issues. Onto the charts! Are Yields over 20% OK? No! Ummm, no, you should not buy these very very high yielding stocks. Let's zoom into the period 1/2012 to 3/2018. Are 20% Yields OK after 2012? No! Perhaps the 20% is just too high. How does yield line up with performance? Lower yields have better performance Lower seems to be better. Notice that the line at the top is the S&P 500, and the line right next to it is 0% yield to 3% yield, which includes almost all normally yielding stocks. 3%-6% is worse, but not much worse. Did lower yielding stocks always have better performance? Stocks in yield buckets, 1/1995 to 3/2018 Over the long haul, it seems that yields below 9% have little impact, but anything over that is still problematic.
  2. What about the raw closing price? Is a $5 dollar stock better or worse than a $10 dollar stock? We ignore dividend yields here (we'll pull it all together at the end). Also we use raw closing prices, to avoid getting confused by future splits. Closing prices below 10 seem to be trouble It looks like you actually want a $20 dollar stock, or more.
  3. Finally, what about a high yielding stock? In that space, which price is best. We don't restrict ourselves to 20% since there were very few matches in that span. Instead we limit ourselves to 9%+ Mixed picture -- lower is better assuming high yield Well look at that! Apparently, if you take very high yield as a given, lower closing prices are better. Apparently, over $20 dollars, there were few enough matches that the screener sat in cash, but performance notched lower band by band until then.

So there you have it. Don't buy super high yield stocks. Don't buy low priced stocks. But if you can't stop yourself from buying super high yield stocks, buy low priced ones. The stock market is a very weird place. Note: I am a founder of Equities Lab.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.