2da6s

Recently I like to invest in high dividend stocks. Personally I feel that high dividend stocks can bring me better cash flow and therefore more profit.

I say better cash flow because when a stock pays dividend, as the investor, I get the dividend in form of cash. The profit is cashed out from my investment and I can have more cash to do other investment.

Although the stock price will drop approximately by the amount of the dividend on the ex-dividend date, but soon or later the stock will go back to the reasonable price. Of course, the high dividend stocks that I invest in must also have good fundamental (e.g. strong cash flow, profit increase every year).

Why stock price drops when it pays dividend? This is because in the stock market, everyone knows that the company which is paying dividend will take some cash from the company to pay to their investors and investors will buy the company’s stock with a price that is approximately lesser than it’s original price.

Lets take an example. Stock A and stock B are having EPS (earning per share) of 20 cents. With PER (price earning ration) of 10, both are price at $2.00. When both’s earning increased to say 25sen, theoretically their price will be increase to $2.50. At year end, stock A has paid zero dividend and stock B has paid 20 cents of dividend.

Although stock B’s price will drop approximately to $2.20 but  its price will go back to $2.50 soon or later because the market will still think the stock is still worth $2.50 (if the reasonable PER is 10).

You see the different now? If you buy stock A, the paper profit is about 25%. If you buy stock B, the paper profit is about 25% but you have already have another 20 cents which is about 8% of dividend yield. With additional of 20 cents on hand you can reinvest into the stock or do other investment.

That is why I like high dividend stock with good fundamental. This is just my personal opinion and it might be wrong