Chasing the highest yield lowers your income over time.

Chasing the highest yield lowers your income over time

The fattest yields on any screen belong to the payouts the market has already stopped believing.

On $100,000, a portfolio yielding 9 percent pays $9,000 over a year, and a portfolio yielding 3 percent pays $3,000. Put those two numbers side by side and the choice looks settled.

A yield is the dividend divided by the share price. The dividend can rise, which lifts the yield honestly, or the price can fall, which lifts it for a reason nobody wants. Both routes arrive at the top of the same list.

A screen sorted by yield ranks payouts by how little the market trusts them. A payout the market has stopped trusting is usually a payout under strain.

Buy the top of that list, take the cut, then move the smaller balance to the next big number. The income the screen promised keeps landing lighter than the number that pulled you in.

Four rotations to the top of the yield list

Every move starts with less money than the move before it.

Start with $100,000 and one rule. Every January, hold whatever pays the highest yield on the screen.

Year one buys a stock yielding 10 percent, which pays $10,000 over that year. During the year the company halves its dividend and the share price falls 40 percent, so the account ends year one at $60,000.

Year two moves that $60,000 into the next 10 percent yielder and collects $6,000 over the year. The same thing happens again, and year two ends at $36,000.

Year three pays $3,600 and ends at $21,600. Year four pays $2,160 and, when the pattern repeats once more, ends at $12,960.

Now set that beside a duller portfolio. The same $100,000 goes into a stock yielding 3 percent that raises its dividend 6 percent a year and whose price ends the four years where it started. It pays $3,000 in year one, $3,180 in year two, about $3,371 in year three, and about $3,573 in year four.

The chase wins the first three years on income and loses the fourth, paying $2,160 against $3,573. Across the full four years it collected about $21,760 to the quiet portfolio's $13,124, so it earned roughly $8,636 more income over that stretch. It finished those same four years holding $12,960 while the quiet portfolio still held its $100,000.

The risk worth naming plainly: a dividend cut almost always lands together with a falling price, so a yield chaser takes the income loss and the capital loss in the same year. Every rotation after that is funded by a smaller balance, and a smaller balance at the same yield pays less. That is how a plan built to maximize income ends up producing less of it.

Illustrative example with round numbers and assumed figures, not a forecast. General education, not advice.

The yield on a screen is mostly the market's opinion of the price.

Every yield is built from two numbers. The dividend comes from the company. The price comes from every buyer and seller who traded the stock that day.

Readers credit the whole figure to the company. A 10 percent yield reads as generosity when most of it was produced by other investors selling.

The pull gets stronger because income is easy to count and risk is not. Yields sort cleanly from high to low. The chance of a cut refuses to sort at all, so the number that ranks becomes the number that decides.

A list sorted by yield sits close to a list sorted by how worried the market is about each payout. Anyone who buys the top of it, year after year, has volunteered to own the most doubted dividends in the market.

That is the issue. Short, on purpose. This week's move takes two minutes: find the highest yielding position you own and look up its dividend per share today and five years ago.

Compare the two dollar amounts and ignore the yields for a moment. Most finance sites publish a dividend history on the company's page.

If the dividend in dollars is flat or lower than it was five years ago, the yield reached its level by way of a falling price. That is a different holding than the one the screen advertised.

Hit reply and tell us what you found. We read every response, and it shapes what we write.

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