Reach too high and something may fall over.
There is a well-known adage that says “Trees Don’t Grow To The Sky” which is frequently used in a business context. In business, this saying suggests that growth is not linearly predestined; companies and efforts will encounter setbacks; large companies cannot continue growing at the same rate as they did when they were smaller.
Where Do We Start
What is a reasonable dividend? Dividends are all over the place. Average dividends for the Dow Jones and S&P 500 hover near 2%. Many large stable companies can yield upwards of 3% or higher. Some even reach to 6% on occasion. Any company with a dividend can see an unusual spike in yield if the stock price declines but the dividend does not.
When dividend yields exceed a reasonable amount, then I become very wary. My opinion is that too high a high yield is a risky proposition. Anything approaching or exceeding, say 7% or greater, is too risky in my book. Reasonable minds may differ.
When mentioning that yields rise as a company’s stock price declines but the dividend does not, we can say that many times the stock price declines for a reason. It pays to discern the differences. For example, is there a decline in business? Or is business continuing well otherwise?
We say that a company’s business condition may have declined and the stock then declines as a result. It is then reasonable to consider that the dividend may be subsequently reduced.
On the other hand, if the stock decline is due to overall economic conditions (or a stock market plunge) but the individual company is still strong, a dip in stock price might mean a temporary opportunity to buy at an elevated yield.
Thus not all high yields are the same.
In general, high yields, 7% or higher, do not appeal to me because of the risk involved. I surmise that these kinds of companies are in highly cyclical and volatile industries. In other words, mostly speculative rather than investment. I look for long term, stable, in for the long run kinds of companies.
I should mention I don’t sell a stock simply because it’s yield increased. If it is one of the businesses whose stock I bought when dividend yield was comfortable, and now yield increases for a variety of reasons, I am happy to be the recipient of such circumstances, and assume that the yield will later return to earth. But I would hesitate to buy a stock when it’s yield is out of my comfort range.
How high is too high for you? Let me know here.
The photograph of assorted breads is from the 1903 book “The Book of Bread” by Owen Simmons. Courtesy Leeds University Library. Leeds Univeristy is located in Leeds, West Yorkshire, England.
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