High Yield Stock Advantages

I thought I’d post about the little knonw advantages of high yield stocks, and how going for expensive growth stocks may not be the best option.

Over time, various studies have suggested that high yielding stocks have outperformed lower yielding stocks. The following table illustrates this, showing the returns from 1992 -2002 from the FTSE 350 High/Low yield indices:

The compounding effect of reinvested dividends provides a powerfull factor driving capital growth. This offers an advantage over lower yielding shares which, over the course of 10 or 20 years could add up to a significant proportion of the invested capital.

Another benefit of high yield socks is the protection they provide in a weak stock market. As the share price falls, the yield increases, this makes the share more attractive and as a result high yielding shares tend to fall less in bear markets (see table above).

Many people think that selecting higher yielding shares means that means giving up some degree of capital growth. However TMPPyad, in this article about the power of dividends, disputes this, saying:

“Any simple analysis of compound returns will demonstrate that adding say 4% per year worth of dividends over a long period will have a very substantial beneficial effect on the final sum created. Now that would be negated to some extent if it could be shown that in return for the relatively high yield of 4% you have to sacrifice something in the way of capital gain. But the paradox is that you do not. Contrary to the belief of some investors, and some investment writers who ought to know better, a well-selected group of high yield shares will, with reinvested dividends, be likely to outperform a selection of low yielding shares and also the market.”