Be wary of dividend-paying stocks with extremely high yields

The urge to reach for yield can be hard to resist. But income investors should be wary of securities with extraordinarily high yields because they’re often accompanied by similarly large risks.list

Similarly, an equally-weighted portfolio of all the businesses in the index climbed by an average of 7.2 per cent annually over the same period when rebalanced each year. The dividend payers are then put into five portfolios based on yield. The portfolios each contain as close to an equal number of constituents as possible. The portfolio of dividend payers with the second-highest yields fared the best, with average annual gains of 10.2 per cent from the end of 2001 to the end of 2022.

I repeated the process by splitting the highest yield half in half yet again. The portfolio with the 5 per cent of businesses with the very highest yields gained an average of just 0.4 per cent annually. Gulp!

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