Investment Strategy: Buy stocks with high dividend yields

The dividend yield is dividend per share divided by the price per share. The dividend yield is also called the dividend-price ratio. The dividend per share is the dividend for the previous year, while the price per share is the current price on the stock market. Instead of dividend per share for the previous year, estimated dividend per share for the next year might be used.

A high dividend yield means that a stock is under priced or that the company is facing problems. Similarly, a low dividend yield might be a sign that a stock is over priced. To determine the health of a company you must check the other fundamental parameters.

The dividend yield of the Dow Jones Industrial Average has fluctuated between 3% and 6.0%. The highest Dow Jones dividend yield was about 15% (1932), and the lowest dividend yield of the DJIA was below 1.5% (2000). At the moment (April 2010) the dividend yield of the DJIA is about 2.7%. It is also important to notice that a profit can be either reinvested in the business (called retained earnings), or it can be paid to the shareholders as a dividend. Therefore the dividend yield might be zero. Well established companies usually have higher dividend yields. Growth oriented companies usually have lower dividend yields.