In the current low interest rate environment this approach has become much more common. Investors have not been able to get the yield they desire from term deposits and online savings accounts so they have turned to high yielding shares (such as banks and infrastructure shares) in order to get the yield they desire. Why would you invest in a bank account at 2.5% p.a. when you can easily invest in a bank and get a 5.0% yield on a commercial bank or infrastructure stock?
A problem occurs when some investors look at these stocks and their dividend yields like they would a term deposit which is completely the wrong way to go about it. This post will try and highlight some of the things you should be looking out for when you invest in stocks for their dividend yield.
Things you should consider when investing for dividends is your focus
There are risks when investing for dividends is your primary focus especially in an environment like this. Below are just a few of the questions you should be asking yourself whenever you undertake an investment like this
1. If interest rates revert to more 'normal' levels what will happen to the value of this stock?
A lot of high dividend stocks have been driven up in price as people search for yield outside the fixed interest sectors. If interest rates return to more 'normal' levels and people no longer have to invest in these stocks to get the yield then the value of your investment in these stocks may fall.
This is a function of the current market that you can't avoid and is a risk you need to know that you're taking on by investing in high yielding stocks.
2. What is the outlook for the company that you are investing in?
Dividends can be cut. It actually happens far more