Why would some dividend stocks yield 8% while others yield 6%, 3%, or even 1%? Are higher yield stocks riskier? The answer is not as simple as a “yes” or “no”.
The risk in investing in stocks
First, let’s define “risk”. Some define risk as “volatility” — the more ups and downs a stock experiences, the higher risk it’s perceived to have. Volatility is often associated with “beta”.
If a stock has a beta of 1 when the stock market goes up by 1%, the stock goes up by 1%, and if the market declines 1%, the stock also declines 1%. Oh, and the beta changes over time. (So, use that metric as a reference and don’t bet on it too much.)
I think the true risk of investing in stocks is selling at a loss. For some people, it’s difficult to hold on to volatile stocks because they can’t bear to see their investments going up or down too much. So, volatile stocks are risky for those people. (But stocks are inherently volatile because they trade on the market…but that’s a topic for another day.)
The risk in investing in dividend stocks
When you buy dividend stocks, you, of course, expect its dividend to be safe. But as we know, occasionally, stocks do cut their dividends. So, a dividend stock that’s risky would have signs indicating it might cut its dividend.