Which dividend bearing stock should be chosen by price?

Question

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?

Answer 1

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.

Answer 2

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.

Answer 3

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.

Answer 4

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.

Answer 5

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! Ummm, no, you should not buy these very very high yielding stocks. Let's zoom into the period 1/2012 to 3/2018. Perhaps the 20% is just too high. How does yield line up with 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? 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. 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%+ 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.