Todd identifies two different types of dividend stocks:
- 'dividend growth', where the companies still have a lot of growth left in them – examples are Tesco, Reckitt Benckiser, that pay around the FTSE 100/All-Share average in terms of yield, but they grow that yield or their dividend payout at about an 8 to 10% per year, so they have earnings growth potential.
- 'high yield', which are shares that yield over 50% the market average. So with the FTSE around 3% average, that's 4.5% average and higher examples include: Vodafone, National Grid. These companies pay a really high dividend, but the dividend isn't really going to grow, so you're buying those more for the current income than you're paying for the future growth in that income.
He also points out the potential dangers of investing in very high yield shares. If they're paying such high dividends, that means one of two things:
- If the yield is high, it means that the stock price may be down, and that the market has concerns about the company long term.
- Alternatively, if the company is paying an enormous yield, it means that it's not funding the projects to invest in that, or worth keeping the money rather than paying it out to shareholders.
I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.