High-yield stocks 101

Q

What are “highyield” stocks? — K.R., Sacramento, California

A

They’re stocks that pay generous dividends, as expressed by their dividend yield.

A dividend yield is simply a company’s current annual dividend amount divided by its stock’s current price. If Fingernail-on-Blackboard Car Alarm Co. (ticker: AIEEEE) pays $2 per year (typically, it would be $0.50 per quarter) and trades for $50 per share, its yield is 4 percent (2 divided by 50 is 0.04).

Many solid companies, such as FedEx and Nike, sport low dividend yields. Others, such as Amazon.com, Facebook and Alphabet, pay no dividend at all. That’s not necessarily bad -- it just suggests that they have better things to do with their money, such as reinvesting it to grow their business. Instead of a dividend, they might deliver relatively rapid stock price appreciation, though that’s never guaranteed. Dividends aren’t guaranteed, either, but with established, growing companies, they’re rather reliable.

For a list of promising dividend-paying stocks, try our “Motley Fool Income Investor” newsletter for free at fool.com/ shop/newsletters.

Q

Can you explain the significance of tulips in financial history? I gather something interesting happened with them long ago. — D.W., Lima, Ohio

A

There was a “tulipmania” in Holland in the mid-1600s. It’s one of the first documented cases of a speculative investing frenzy, with some people even taking out loans on their homes in order to buy tulip bulbs. Prices soared, with some bulbs eventually valued at more than the cost of a nice house, and then the bubble eventually burst, wiping out many investors.

The easiest way to avoid such trouble is to not invest with borrowed money and to be wary of stocks that seem to have soared beyond reason.