The dividend yield is another important concept in deciding how to buy stocks.

The dividend yield is defined as the dividend per share as a percentage of the share price, and is an important metric in deciding which are good dividend paying stocks.

Resource stocks generally tend to have the lowest dividend yields.  This is because most miners are in an expansion phase, and as such use their profits to re-invest back into the business.

Stable industries like the financial sector, and many real estate companies, tend to have the higher dividend yields.

Some of the leading dividend yield stocks are

Hastings Diversified Fund which is an infrastructure fund with some gas transmission assets. Its dividend yield is 9.7%.

Telstra is still up there but its share price continues to take a beating. We don’t feel its dividend payments are sustainable at 9.6%, given that earnings aren’t expected to grow any time soon.

Tattersalls and Tabcorp are also up there paying over 8% dividend yield.

Stockland is one of our preferred ones, currently has a yield of 6.7%.

Among the big banks, National Bank is leading the way with a yield of 5.5% while Westpac, ANZ and Commonwealth Bank are around 4.3%.

BHP Billiton has a yield of around 2.6%.

A final point to consider in deciding how to buy stocks, is that shares may have high dividend yields because their price has sunk so low.

A company whose dividends are falling at a slower rate than the decline in their share price, will actually see their dividend yield rise.  Consequently, the returns from dividend payments are offset by a declining share price, so the investor ends up losing out on a stock with a higher dividend yield.

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When considering how to buy shares, attention must be paid to the stock’s dividends.

Dividends are a share of company profits that are paid to stockholders of the underlying company.

They are usually paid twice a year on a ‘per share’ basis.  Dividends differ to fixed-interest payments in that the decision to pay the dividend, and the amount, are at the discretion of the company’s directors.

Dividends are indeed at a historical low. The global financial crisis hurt the profitability of many companies, and dividends fell in line with profits.  As profits fell, companies increasingly focused on preserving capital and reinvesting in the business rather than returning capital to shareholders.

Whether dividends are important or not depends on the nature of the investor.

Often you will find that high growth companies will not pay dividends, as they tend to re-invest their excess profits to continue their growth.

These stocks will typically have a rising share price, so there is little incentive for the business to pay shareholders who are already benefiting from owning the stock additional cash.

The more aggressive investors tend to favour low dividend/high growth stocks, as they consider the growth potential of the stock to be a greater source of return than dividends.

However, companies with good dividend yield tend to offer investors security and confidence in the business and also benefit from dividend re-investment.  Mature companies with stable profits tend to pay the highest dividends.  This is because they have less of a need to preserve their capital.

The more conservative investors may prefer the income security that dividends provide, as opposed to the capital appreciation potential of the underlying stock.

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