# Pros and Cons of High-Dividend Stocks By: [Team Stash](/content/learn/author/team-stash/index.html) Published: Jun 25, 2020 • Updated: Aug 26, 2024 Take a look at the benefits and drawbacks of high dividend stocks to get a better idea for how these securities can contribute to a diversified portfolio. #### In this article: 1. [**What companies pay dividends?**](/content/learn/pros-cons-of-high-dividend-stocks/#what-companies-pay-dividends/index.html) 2. [**How do I know if a stock pays a dividend?**](/content/learn/pros-cons-of-high-dividend-stocks/#how-do-i-know-if-a-stock-pays-a-dividend/index.html) 3. [**What is a high dividend stock?**](/content/learn/pros-cons-of-high-dividend-stocks/#what-is-a-high-dividend-stock/index.html) 4. [**The Benefits of High-Dividend Stocks**](/content/learn/pros-cons-of-high-dividend-stocks/#the-benefits-of-high-dividend-stocks/index.html) 5. [**The Drawbacks of High-Dividend Stocks**](/content/learn/pros-cons-of-high-dividend-stocks/#the-drawbacks-of-high-dividend-stocks/index.html) Investors typically expect a return on their investments when they put money in the stock market. One way they can get a return is through an increase in stock value. Another way is through a dividend payment. A [dividend](/content/learn/how-do-dividends-work/index.html) is a payout, or reward, paid by some companies to their shareholders as a share of the company’s profits. While they’re typically distributed as cash, they are sometimes rewarded in the form of additional [shares](/content/learn/difference-between-stocks-and-shares/index.html). And by [reinvesting dividends](/content/learn/congrats-you-received-a-dividend-heres-what-that-means-and-how-you-can-use-it/index.html), you can potentially increase the impact [compounding](/content/learn/what-is-compounding/index.html) has on your portfolio’s total returns. But not all [dividend-paying stocks](/content/learn/stocks-that-pay-dividends/index.html) are created equal. Some are known as high-dividend stocks, because they deliver above average dividend yields relative to their share price. We explain more about high-dividend stocks below. ## What companies pay dividends? Not every company pays a dividend, though. It’s usually older and more established companies that do. In fact, the majority of the companies on the [S&P 500 index](/content/learn/how-to-invest-in-sp500-2/index.html) pay dividends, and nearly half of these [reportedly](https://www.barrons.com/articles/big-dividend-yield-sp-500-stocks-bonds-51562689160) have a higher [dividend yield](/content/learn/dividend-yield/index.html) than the current rate of the 10-year Treasury, which is a benchmark investment in the world of bonds. ## How do I know if a stock pays a dividend? Stash offers stocks that pay dividends, funds of dividend-paying companies on the S&P 500 and investments that offer no dividends. Take a look at the table below that allows you to sort all investments on the platform by dividend yield (highest to lowest): This information is only educational, and the historical performance data quoted represents past performance, does not guarantee future results. ## What is a high dividend stock? The table above lists the [dividend yield](/content/learn/whats-dividend-yield-all-about/index.html) of all investments offered by Stash. A dividend yield is a mathematical formula that measures a company’s annual dividend payment compared to its share price. The dividend yield of a particular stock is calculated by dividing the annual dividend per share by the price per share, and multiplying that by 100. The dividend yield of a stock inversely relates to the price of the stock. So, if the price of the stock increases, the yield will decrease. And if the price decreases, the yield will increase. A high-dividend yield is one that falls above the average yield of stocks sold on that market. For example, the average dividend yield of the S&P 500, which is known as the market’s main bellwether, is [2.31%](https://ycharts.com/indicators/sp_500_dividend_yield) and usually hovers around 2%. So, a stock with a dividend yield of say 5.3% would be considered a higher dividend stock. ## The Benefits of High-Dividend Stocks High-dividend stocks come with benefits and drawbacks. A high-dividend yield might mean that the company is in a good position to pay out high dividends relative to how much you’re paying per share. Remember that you can reinvest dividends automatically into stocks and ETFs using [DRIP](/content/learn/everything-you-need-to-know-about-drip/index.html). Higher dividends can mean more money to reinvest and further grow your accounts. ## The Drawbacks of High-Dividend Stocks However, a high-dividend yield can also indicate that a stock is a risky investment, and it doesn’t necessarily mean you should automatically invest in that stock. Here’s why: When the stock price drops relative to the dividend, the yield will increase. (Remember our ratio above, where a stock’s price and dividend yield move in opposite directions.) So, while a low share price and a high-dividend yield might seem like a great combination, it might also spell volatility for that company. If you’re interested in investing in a company with a high dividend yield, make sure to do your research about news related to the company. Additionally, research other important performance metrics such as revenue, profit, losses, and [P/E ratio.](/content/learn/what-is-a-good-pe-ratio/index.html) And when you’re ready to invest, remember that you can start with any dollar amount on Stash.