Many investors think: “This stock has a high dividend yield, so I should buy or hold it.” We hear this very often. But what does a high dividend yield actually tell us about a company?
A high dividend yield usually means the company does not know how to reinvest its profits for future growth, so it distributes most of the money to shareholders. If a company truly needs capital for expansion, it cannot give high dividends. Also, there is no rule that a company must give dividends at all.
Understanding High Dividend Yield
If a company gives only dividends and nothing else, investors should not expect high stock returns. For long-term wealth creation, we need companies that increase their dividends every year. We do not need companies whose dividends are high but flat, because flat dividends signal “no growth.”
A company whose dividends rise every year is telling you that business growth is happening. But if dividends remain high yet unchanged for many years, it usually means the company has stopped growing.
Simple Logic
To grow a business, companies need money. If the business needs money, how can it keep giving high dividends?
Generally, companies with high dividend yields also have low PE ratios because there is no growth story. But small investors often get attracted to high-yield, low-PE stocks. In reality, the biggest wealth creation has historically happened in low-yield stocks with rising PE ratios.
Impact on Book Value
If a company keeps giving very high dividends, its book value will not grow because profits are not retained. It becomes a matter of personal choice: if you feel small dividend returns are enough, that’s fine. But in that case, why take stock market volatility? Safer investment options may suit better.
Example: HUL
Hindustan Unilever (HUL) has been a high dividend–yield company for many years, with payout ratios around 80–90%. But its growth has been weak:
- 5-year CAGR: ~9%
- 3-year return: ~6%
- 1-year return: Negative
The issue is not the dividend—it is the company’s limited growth. As explained in your book, high dividends do not equal high returns.
Example: ITC
ITC is an exception. The stock rose in the last three years due to business tailwinds and earnings improvement, not because of high dividends. Exceptions exist, but they are rare.
The Reality
Nearly 75% of high dividend yield companies do not deliver strong long-term stock price appreciation.
The formula explains why:
Dividend Yield = Dividend per Share ÷ Market Price
If the stock price stays low, the yield remains high. If the stock price rises, the yield automatically becomes low. So a consistently high yield itself means the stock price is not moving.
What Investors Really Need
For long-term wealth creation, choose companies that:
- Increase dividends year after year, or
- Reinvest profits for growth (even if they don’t give dividends)
We do not need high dividend–yield stocks. We need companies with strong business growth.