The best choice for the investor is to pick the stock that has a yield that is equal to their income needs

In all this is my implicit assumption (El Lobo disagrees and has good arguments for why) that higher yield stocks are riskier.

Of course, all things are not equal.  Sometimes stocks are cheap and sometimes expensive, there is diversification to worry about, and the financial condition of the company.

Except for your last paragraph, which seems to focus most on specific stock selection, this whole argument/discussion takes on the "feel" of active/passive arguments.  There's one choice or  selection and it comprises the entire portfolio and is the sole income source.  Although there are some individuals (that was not the i word I was thinking of) whose entire portfolio consists solely of one stock or off the mainstream fund  most of us have SS, possibly pensions, bonds and a reasonably well diversified portfolio or collection of assets.

 I don't have steak for dinner every night, night after night.  There's hamburger, fish, chicken and shrimp and sides and how filling those are determines the amount of the main dish I might serve so that there's a lot more of sides than entree.  Our portfolios are like that.  GE provides me with $20/quarter income.  ACAS provides me with $100/quarter income on approximately the same original amount of money bought at the same time.

Roberta 

It was not my intention to say there is only one choice... or heaven forgid to sound like indexing :-).  Just the opposite...

I think we all agree that when faced with investment choices that have the same expected growth, we will choose the least risky one.  This last statement seems obvious.  In my post above, I was saying...

If you believe that risk increases with yield, then when choosing between *identical* investments (idential defined here to mean those with equal "dividend yield plus dividend growth") then the investment with the least yield is best (in my opinion).  This statement hinges on believing there is a correlation between risk and yield. 

Unfortunately, some do not believe... ***That is an indexing-like statement***

Stats

equation is a simplification of the equation generally used, he points this out early in the book. I don't know why he made the simplification, the general equation is not much more complex...

E = [ D ( 1 + g) ] / P + g

E, expected return

D, the current div

P, the current price

g, earnings growth.

Generally it's assumed div growth will be approximately the same as earnings growth, but this need not be the case.

Good Luck, Ken. 

gets older it's probably ok to tilt more toward yield, the long term is becoming less of an issue so give me my money now. Sort of like the AA shift from stocks to bonds as one ages, supposedly.

OTOH, while div growth is a great thing I think having div growth on an already sizable dividend is the cat's meow. Div growth doesn't help when a stock is yielding 0.01% for a time, then cuts the div...time wasted.

IMO HY beyond a certain point is riskier, less money channeled back into corporate growth and long term security of the dividend. That certain point is the rub, and why at least for now I'm quite comfortable having my fund managers do this analysis.

Good Luck, Ken.

Stats,

Now I'm confused.

"If you believe that risk increases with yield, then when choosing between *identical* investments (idential defined here to mean those with equal "dividend yield plus dividend growth") then the investment with the least yield is best (in my opinion).  This statement hinges on believing there is a correlation between risk and yield."

OK, you have two companys, A has a 10% yield and zero yield growth rate, company B has a 1% yield, 9% dividend growth rate.  Both companys are identical in all other respects (think two oil companys, like XOM and ERF, for example).  Again, do you believe company A is riskier then company B?  If so, why?

Next, what kind of a correlation are you thinking about (between risk and yield)?  Specifically, what is your measure of risk?  (I assume you are thinking the volatility of either the yield or the underlying share price of the stock.)

Ken,

"less money channeled back into corporate growth and long term security of the dividend."

That's the rationale for a high dividend payout ratio stocks being riskier, not high percentage yield.  Also, the risk is tied to the ratio and the dollar amount of the dividend, not it's percentage yield, which depends on share price.

yes, but if the price is low, ie HY, you're in even worse shape. Then you have a company in distress paying out a high div.

Ken,

"Then you have a company in distress paying out a high div."

Or you have a company NOT in distress, paying it's normal dividend, whose share price has been beaten down by the market.  Or whose share price is moving within it's normal range.

Correct me if I am wrong, but do you assume that, since high yield debt is riskier then low yield debt, the same holds for equity?

The point is that you can have quality dividends and risky dividends, based on many factors, but you can't simply assume that high percentage yields are riskier then low percentage yields.  After all, percentage yields are a function of TWO numbers, one of which (share prices) are considerably more volatile, hence risky, then dividend distributions!

El Lobo... I am thinking the risk of a dividend cut.  

I have seen a table (can not find it now), maybe it was in Dreman's book on high yield stocks that shows the relationship between yield and dvidend cuts.  The table showed that as yield increased the risk of a dividend cut increased as well.

I know there are quality dividends and their are risky dividends.  But in a discussion like this where we are not focussing on quality or risky but on a current yield of 10% versus 1%, I assume that the 10% dividend company is riskier.

It seems like we are talking around each other.  I am not doing it intentionally nor do I think you are... but clearly there is a disconnect.

I just do not see how you can think that a company that pays 10% dividend is safer than one that pays 1%. To put it another way.... YES, I think that risk of a dividend cut at ERF is much higher than one at XOM.

Stats