Don t buy the stock of a company if you are unable to directly form a judgment on the prospects of the firm. Some companies have products and exist in markets that are technically complex and therefore difficult to evaluate by individuals not familiar with the area. If that is the case, you may be relying on the opinions of others to form your investment decision. Instead, stick to more familiar territory. Don t seek out high dividend yielding stocks in the belief that the higher the dividend yield, the better.
Many investors consider high dividend paying stocks to be relatively conservative investments.
Make sure you evaluate the firm s dividend-paying history, and future prospects, when considering high dividend yielding stocks. Contrarian investors seek stocks with low price-earnings ratios or low prices relative to book values in the belief that the market has misjudged the future prospects of a firm. However, there are risks to being a knee-jerk contrarian investor. Don t inadvertently concentrate in one industry or in highly related industries. Diversification is crucial to reducing firm and industry risk, yet many investors fail to effectively diversify by following a strategy that inadvertently concentrates their portfolio in one industry.