Should you Buy the Highest Dividend Paying Stocks?

Are you in search of the highest dividend paying stocks to invest in? Maybe you are looking to profit on a great stock tip you recently got from a friend, where the company has a double digit dividend yield. Most novice investors simply look at the current dividend yield from financial online sites to make decisions on whether to buy the stock or not. This process of chasing a high dividend yield is not recommended when building a long term dividend producing portfolio that can be used as an income stream.

So how do you determine if a stock on your radar with a high dividend yield can sustain it's payout? Following a few steps can help assist you in making an educated decision on which of the highest dividend paying stocks to invest in.

1. Historical Dividends - One of the most valuable pieces of information to use when evaluating a dividend producing stock is by looking at historical performance. You can download this data from most financial websites for free or by viewing this information through an online discount broker. Looking at historical dividend payouts will give you an idea of how long a company has sustained a dividend payment and periodic increase.
2. Company Management - How is the company run? Are the top level managers effective in leading their employees? While you probably can't directly communicate with top level managers at a company, you surely can research their historical performance of running the company. How a company is managed will speak volumes on how legitimate their dividend yield is set at.
3. Stock Price - How stable has the stock price been in the past 12 months? If the company's share price has fallen considerably in the past few months, the current reported dividend yield may be a little skewed as it is a lagging indicator. Therefore, stock performance and price are a key indicator in identifying the value of the highest dividend paying stocks.
4. Industry Growth and Macro Economy - Besides looking just at the financial and technical details when researching a stock, you should also research the industry growth potential for the company. You will also want to check up on how the overall stock market and global economy is doing. If we are in a recession, then it may be a good time to pick up some of the highest dividend paying stocks to add to your portfolio.

While this list is not inclusive of all the steps you can take to research a stocks dividend yield, the items posted above can help you get started.

Don't get caught up in buying the highest dividend paying stocks and building a portfolio with them.  Chances are there is a reason for the inflated yield.  As mentioned earlier, the dividend yield is a lagging value that may not truly reflect where the company and overall market are trending.

If you choose to buy dividend yielding stocks, then the single most important rule is to do your own research.  Investors must take responsibility for their actions and decisions.  Be sure to learn from your mistakes (as you know they will happen) to increase the value of your portfolio.