why does a stock with lower yield better then a stock with higher yeild ?

Question

please explain and provide a link for details if possible. thanks

Answer 1

The theory is this: If the company is not paying a dividend, it is using the money to expand the business. By expanding the business, they will earn more money that will cause the value of the company to increase and therefore increase the value of your investment in the company. There is also the question of taxes. Dividends are taxed. As long as one does not sell his/her investment in the company and the value of that investment increases, the increase in value is not taxed and will therefore grow at an overall faster rate.

That is the theory. In actuality there are a couple of problems with that theory. One is that the company will reinvest the money to increase it profits may not in fact happen. They may use the money for other purposes such as paying themselves larger bonuses or they may invest the money in such a way that it earns no profit at all. A sad but very true scenario. The other is that the market will not react adversly to the low dividend policy of the company. If fact the market often does react adversly, especially during times of bear markets, when stocks with low dividend payouts drop much more severly that stocks with high dividend payouts.

Answer 2

There are two types of returns from a stock investment. The first is "dividends" which is the "yield" you are refering to. If a $100 stock is paying $2 in dividends a year, it is yielding a 2% return. The other return is called a "capital gain" which is when say a stock goes up from $10 to $12 in the market. The $2 rise is called a capital gain. So, a stocks "total return" is made up of dividends and capital gains (or possibly losses). The average annual "total return" from a portfolio of stocks is about 10% over long periods of time, but only maybe 20% of that return typically comes from dividends. So, capital gains are the most important part of a stock's total return. In summary a stock's yield does not matter, only it's total return!

Answer 3

There are too many markets for stocks for this to be true, and really, there are too many reasons for a stock to perform or not.

Some stocks can be hitting earnings records and tank in stock price for the simple reason that they didn't maintain the standards of their listing exchange and got bumped. Other companies can be prodigiously losing money and be popular based on speculation of their recently acquired patents.

The driving force, though, behind many companies in the marketplace is the money managers, the managers who operate pensions, mutual funds and the like, because they handle such a large volume of money. Their determinations of whether to buy, sell or hold have a very large impact on the demand for a stock. Many of them just follow Standard and Poors rations or Moody's ratings.

(Just for fun, turn on a financial program some time on the news or look at the stock picks of so-called financial experts. Track their predictions and see if they really know what stocks will perform. In my experience, most analysts don't have a clue because you can't predict the future, but they have a lot of fun guessing.)

Answer 4

Hight yield means high dividend and low yield low dividend pay out. High dividends gives a signal that the company don't intent to grow in the near future and they don't need their internal accruals much in the near term. This means companies long term and short terms goals are suspect.
Contrary to that, low dividend pay out means company is increasing it's internal accruals for future growth, meaning long term performance is going to be rosy.