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I get a lot of questions regarding the purchasing of stocks that pay high dividends and I think there are some misconceptions regarding the meaning and process of owning a high dividend paying stock.

First, ask yourself how high should the dividend be? \xa0Some company\u2019s pay 2%, some 4% and some pay 10%. \xa0Is 10% really the best?
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Look at the ratio of the dividend to actual earnings\u2026.if a company earns 1 dollar and pays .80 cents. That could be a warning sign. Even though the dividend yield is 8%. It might not be sustainable.
Sometimes a lower dividend paid by a company with increasing earnings and high a dividend growth rate can be better.
Think of a dividend as a bond with an increasing coupon. What is 3% today could be 6% in 7 years.
The excess of earnings that the company retains is your true yield. \xa0If a company earns a dollar, pays .30 cents and retains .70 cents. The intrinsic value of the company could be rising by .70 per year. On a 15 dollar stock that is an crease of about 5% in intrinsic value per year. Add the 5% to the 3% you are getting in dividend and at that price, you could have an average 8% appreciation per year.
Stock price movements won\u2019t affect the intrinsic value, so that is what you want to focus on.
Low prices allow you to buy a set of earnings and cash flow for less, thereby increasing your future return. High prices do the opposite.

The Bottom Line
Dividends are only part and generally a small part of the strategy to create wealth. The best and most extreme example is BRK.

BRK has never paid a dividend and has increased from 15 per share to $150,000 per share. It has done this be keeping its earnings and reinvesting those earnings back in itself. \xa0A dividend would have dissipated the earnings.

Think twice and do your homework before investing in stocks purely for the dividend. There is a right way and a wrong way, so don\u2019t make those classic mistakes.