Are high dividend stocks safe?

Many investors are lapping on to stocks where the dividend payout is good even though the valuations are expensive. But this may not be such a wise move. We believe that investors need to look at dividend yield of companies while investing in their stocks. Dividend yield is nothing but the company's dividend per share divided by its stock price. Thus, even if the dividend paid out is good, if the stock price is very high, the yield will not be that great.

At the end of the day, when investing in equity markets, an investor has to look at two factors. One is the benefits of capital appreciation. The other is the dividend yield. The two combined would constitute the total return that would accrue to an investor. And this return will not be strong, if the stock price of any company is disproportionately high. Thus, strong corporate governance, good growth prospects and a healthy dividend policy are certainly prerequisites for investing in equities. But always keep an eye on valuations too.

Source: Equity Master

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