During my early days as a dividend investor, I was focusing my attention to stocks which paid me a generous yield. I would be doing calculations, showing me that at a 10% annual yield I would be able to further compound my profits by reinvesting the dividends. One of the first stocks that I noticed was HYF, a closed-end high-yield bond fund which was paying a generous 10-11% annual dividend. I bought some stock immediately, and after several weeks I received my first dividend payment, which was equal to almost a one percent return per month. I was very excited by this opportunity, which allowed me to compound my gains monthly through the regular reinvestment of dividends. The fund didn’t appreciate by much; nor did it depreciate by much. It was trading in a range, which was perfect for me - I kept receiving and reinvesting my fixed monthly payments of 5.5 cents per share.
After a while the price started decreasing, and I happily reinvested my dividends, realizing that now I would receive a higher yield for my investment at the lower prices. Instead of yielding 10%, the stock was now yielding 12%. Pretty soon though, the dividend was cut, and the yield decreased to 10% again. I was worried a little bit, but I decided that with a 10% yield I would be able to recover my losses over time even if the dividend was cut by a little bit again. For a while it did seem to me that I was going to break-even as I kept reinvesting my dividends and the price was slowly but surely climbing to the level at which I made my first investment. Then disaster strikes again - the dividend was cut and the stock fell again. I was starting to get worried, because I was getting a good yield, but my capital gains were pretty dismal. I checked the historical monthly dividend payments at yahoo finance and it seemed that the company actually had a long-term negative dividend growth. The monthly payments had been steadily decreasing ever since the fund was open for investors. In addition to that the price had been in a decline for some time. I finally realized that super high-dividend yields of over 6% annually are not sustainable in most situations. I also learned that if I would buy a stock just for the dividend payments, I should only buy companies/shares that have a solid history of raising their dividends in both bull and bear cycles over the years. In addition, the company should be a fundamentally sound business, which can afford to pay dividends even if business had a slow year. I also learned that I shouldn’t be chasing a stock simply because it offers an attractive very high yield.