Dividend yield is perhaps the most important factor for some income investors when evaluating which stocks to invest in. Because let’s be real, 8% to 10% yields are far more attractive than 4% returns. Experienced investors, however, know that a high yield can sometimes be a red flag rather than an opportunity.

What Is Dividend Yield?

Dividend yield measures the company’s annual dividend per share as a percentage of its current stock price. The yield will indicate how much cash an investor receives for every dollar invested. There are two ways dividend yields can increase:

1. When dividend payouts increase
2. When the company’s stock price falls

While a higher dividend yield may seem attractive at first glance, percentages alone can be misleading. Here are three reasons why:

Reason #1: A High Yield May Signal a Falling Business

Imagine this: Company A traded at S$5 per share and paid a S$0.20 dividend last year. That translates to a 4% yield....