How to Invest in High-Yield Dividend Stocks

Reinvest your dividends in more shares of stock to increase your dividends.

A stock's dividend yield is the percentage of a stock's price per share that it distributes in dividends. A higher dividend yield means you will receive a higher dividend payment in relation to the stock's price per share. Investing in high-yield dividend stocks can be a lucrative investment strategy because the high yield will add to any returns you receive from an increase in stock price. There are many ways to select and buy high-yield dividend stocks, but reviewing a couple of key financial metrics can increase your chances of success.

Instructions

1. Visit a financial website that provides stock information and find stocks in which you may potentially invest that have at least a 5 percent dividend yield.

2. Find each company's annual dividend payment per share, the number of shares outstanding and the amount of free cash flow the company generated in the past 12 months in each stock's financial metrics or financial ratios section of any website that provides stock information. Free cash flow is the cash available after paying expenses and reinvesting in the business with which a company pays dividends.

3. Divide each stock's free cash flow by the number of shares outstanding to calculate its free cash flow per share. Then divide its annual dividend payment per share by its free cash flow per share to calculate its free cash flow payout ratio, which is the percentage of free cash flow the company pays as dividends.. For example, if a company generates $1.75 million in free cash flow, has 1 million shares outstanding and pays $1 per share in dividends, divide $1.75 million by 1 million to get $1.75 in free cash flow per share. Then divide $1 per share in dividends by $1.75 in free cash flow per share to get a free cash flow ratio of 0.57, or 57 percent.

4. Invest in stocks that generate positive free cash flow and that have a low free cash flow payout ratio. Todd Wenning of The Motley Fool recommends investing in stocks with a free cash flow payout ratio below 80 percent. A company with positive free cash flow and a low free cash flow payout ratio is more likely to generate enough cash to continue paying high dividends.

5. Reinvest a stock's dividends into more shares of the stock. Use a dividend reinvestment plan, or DRIP, if the company has one. A DRIP allows you to reinvest a stock's dividends directly through the company with minimal fees. Reinvesting dividends into more shares increases the number of shares you own, which will increase the amount of dividends you receive. Your share count and dividends will continue to increase, which is a key factor in successful high-yield dividend investing.

References

• The Motley Fool; Are These Dividends Going to Be Around for Long?; Brian Stoffel; May 2011
• The Motley Fool; Now's the Time to Double Down on Dividends; Todd Wenning; January 2009
• MSN Money; Invest One Drip at a Time; Harry Domash; May 2006

Resources

• CNBC: Stock Screener
• Google Finance: Stock Screener
• Nasdaq: Stock Screener
• The Wall Street Journal: Market Data Center -- Top-Yielding Stocks