Dividends are Great, but Avoid High Yields | Trading Data Science

Dividends are Great, but Avoid High Yields | Trading Data Science

Over the last 20 years, approximately 50% of the S&P 500’s returns came from dividends and not capital appreciation. Dr. Data (Michael Rechenthin, PhD) provides evidence that shows a sound strategy to buy dividend stocks and sell implied volatility out-of-the-money (OTM) calls against the position (which reduces cost basis), but stocks with high dividend yields should be approached with caution.

A graph of the dividend yield of the S&P 500 dividend paying stocks (80% of the index components) was displayed. The graph included a note that 50 of the dividend stocks yielded greater than 4%, and one (WMB) pays a yield of 16%.

A graph comparing dividend yield versus market capitalization on the S&P 500 was displayed. The graph showed that the more stable companies don’t have the largest dividend yields and that the stocks that did have high yields had them because their stock price dropped, sometimes by a lot. When you pick high dividend stocks, such as ones more than 4%, you may just end up picking stocks that are underperforming.

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