What dividend yield is too high?

One thing I want you to understand is that the payout ratio of a financial instrument (especially stock) doesn't determine whether it's safe to invest or not. As an intelligent investor, returns (though it's also important) shouldn't take a larger part of your investment decision.

According to Benjamin Graham, "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”

I believe the above quote from Benjamin Graham is self-explanatory. However, the two questions I want you to answer before deciding to go with what the financial advisor said are:

1. Will your principal (investment) be safe for the term of your investment?
2. How much return do you expect from your investment?



Back to the main question: How high should a dividend yield be?

The answer to this question depends on your personal preference. An investor might decide to accept 50% as an adequate dividend yield while another might accept 10% as adequate.

When you're a dividend investor, you're always on the hunt for the highest yield possible.

But is this the soundest strategy?

It might be counterintuitive, but you do not want to chase skyrocketing yields.

In certain cases, companies will increase their dividend yields to attract new investors, despite the fundamentals not working out the way they should. For many businesses, a high yield is unsustainable. Indeed, 8% on a $20 stock is not really the best option for you.

Ultimately, when you are finding dividend stocks, you want to look at other factors, such as the balance sheet and the publicly traded firm's history of payouts and increases.