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What are High Yield Stocks?

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  • Written By: H. Terry
  • Edited By: Jenn Walker
  • Last Modified Date: 26 November 2016
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High yield stocks are stocks that provide a higher dividend yield than that which is considered average. A dividend yield is the percentage of profits a corporation pays out to its stockholders. What is considered average depends on the analyst, and therefore what is considered a high yield stock is also subjective, but most analysts refer to benchmarks such as the U.S. Treasury note in defining an average.

For a dividend yield to be considered high, it should normally provide a greater return on investment than the norm. Stocks that pay significant dividends tend to fare better during stock market downturns and are considered by many investors to be safer bets than other kinds of stocks. There are several popular investment strategies involving high yield stocks; the most widely known of these follow the Dow Jones Industrial Average — a price-weighted stock market index of 30 stocks. Two famous examples are called the Dogs of the Dow, also known as the High Yield Ten, and Beating the Dow Five.

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The Dogs of the Dow was the first innovation of the two. It involves investing equally in the ten Dow stocks with the highest yield and holding onto them for one year, after which any stocks that have fallen below tenth place are replaced with the new high yield stocks that are currently leading the group of 30. It is an easy strategy to follow, as the investor only needs to ensure that each year he or she is still investing in all ten of the current highest yielding stocks.

The Dogs of the Dow requires investing in the top ten high yield stocks. Beating the Dow Five, on the other hand, takes the selection process one step further. In this strategy, the price of purchasing each of those ten highest yielding stocks is also considered, and an investor only strongly invests in the five lowest priced of the group.

High yield stocks are popular amongst investors because of their high payouts and because those same high dividends might also indicate the good health of a company, though of course there is never any guarantee of a stock's future. Stock trading and stock investing can be extremely time-consuming tasks. Following ready-made investment strategies such as the Dogs of the Dow and Beating the Dow Five offer the potential to benefit from high yield stocks without a major investment in terms of time.

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