Find High Yield Stocks

High-yield stocks are stocks that pay high dividends, typically above 5% per year. They are a good option for investment, as they provide a steady income and also have the potential for growth. It is easy to find high-yield stocks. Simply use one of many free stock screeners available on the Web.

Steps

  1. Use a free Internet stock screener. Any one will do. Examples: Yahoo and Google. We'll use the Yahoo stock screener for illustration.
  2. Select a minimum dividend yield in the "Dividend Yield" field. (This is located under the "Share Data" section in the Yahoo stock screener.) Suppose you're looking for at least a 10% yield. Click on the "Min" tab to select 10%.
  3. Click on "Find Stocks" at the bottom. A list of all publicly traded stocks with 10% or higher dividend yield will be generated.
  4. Do your research before deciding which to invest in. Read a company's financial statements in their 10Q (quarterly reports) and 10K (annual reports). Continue to do your research to make sure the fundamentals have not recently changed. If they have, you'll need to reassess their investment-worthiness.

Tips

  • Remember the rule of 72. If you invest in a stock with 10% yield, you can double your investment money in just about seven years from the dividend alone. (72/10 = 7.2 years)
  • In general, you should wait until the next bear market to buy stocks, but if you have extra cash sitting around waiting for the next bear market, it is prudent to invest in high-yield stocks now so you can be paid some dividend income in the mean time, which you can use to buy more stocks when the prices drop with the next bear market.
  • For high-yield stocks, it is helpful to look at the payout ratio (the ratio of dividends-per-share to earnings-per-share). Look for a payout ratio less than 50 percent, which tells you that the company has at least twice as much earnings as the dividend they pay out -- a good margin of safety. If the payout ratio is too high, perhaps close to 100%, it might become difficult for the company to continue paying out a steady dividend should earnings drop.
  • You can modify your search by inputting other criteria to narrow down the list. For example, if you are interested in value stocks (stocks that sell at a relatively low price compared to its earnings, book price, or another measure of valuation), you can enter "10" for the "Max" price/earnings ratio. Doing so in Yahoo stock screener will generate a narrower list of stocks that satisfy both your yield and P/E ratio criteria.
    • Note: the P/E ratio should be as low as possible, which indicates cheaper stocks that have more upside than downside potential. Historically, the lower the P/E ratio, the better the long-term returns.[1] When looking at price-to-earnings ratio, the best way is to calculate average earnings per share for the past five to ten years, then divide the current price by the result to obtain the P/E. In general, stocks with P/E greater than 20 should not be bought. If you bought a stock and its P/E rose to above 20, you should sell a portion of it. Never use forward P/E, which relies on predictions of future earnings that may differ significantly from reality.
    • Similarly, you could narrow the search even further to companies that also have good profit margins, say above 70%. Simply input "70%" for the "Min" profit margin. Doing so in Yahoo stock screener will generate a smaller list of stocks that satisfy all the criteria specified. Note: Profit margin is the net profit as a percentage of revenue. Companies with good profit margins generally have a competitive edge that allows them to generate the most profit from their resources. Companies with higher profit margins are generally safer investments, as a decline in sales is less likely to erase profits and result in net loss.
  • Alternatively, you could simply search the internet for high-yield stocks, but that would tend to identify only highly advertised stocks and not give you the comprehensive list you would get by using a stock screener.

Warnings

  • Dividends are subject to cuts or even elimination. Thus, it is all the more important to find companies with good valuations (low P/E) and high profit margins that are generally safer investments. Stocks with low payout ratios (the portion of net income that companies pay to stockholders in dividends) are less likely to cut dividends. If dividends are cut but the share price has not declined sharply, do not hesitate to sell and use the money to buy higher-yield stocks.
  • No investment is without risk of loss. While stocks generally tend to go up over time, there will be short-interval declines from time to time. You must be prepared to invest for the long term, and diversify appropriately by investing in at least five different stocks from various sectors of the economy to reduce risk of losses. (A minimum of ten stocks would be better. If you intend to place a significant part of your investment money into only a handful of stocks, choose them from a list of large, successful companies such as the "S&P 500" index.)

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References

  1. ↑ Shiller, Robert (2005). Irrational Exuberance (2d ed.). Princeton University Press. ISBN 0-691-12335-7.
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