What is an Accidental High Yielder?

Accidental high yielder describes a company that pays an abnormally high dividend yield due to a decline in its stock price.

The dividend the company pays remains the same, though its stock has declined. Because companies typically adjust their dividend policy once a year and pay dividends quarterly, if their stock suffers a steep price decline, the company can be referred to as an accidental high yielder.

Key Takeaways

  • An accidental high yielder results from a declining stock price without a change in dividend policy. The fixed dividend and declining stock price create a rising yield.
  • Accidental high yielders are common in bear markets.
  • These types of stocks can provide long-term attractive dividends to those who buy at the right time.
  • Dividend yield alone should never determine whether to buy a stock, as continued price declines can outweigh the benefits of dividend payments, and dividend policies may change at any time.

Understanding Accidental High Yielder

An accidental high yielder is a company that pays a high dividend yield, even though this was not management's original intention. The high yield is the result of a steep decline in the company's stock price. The dividend remains the same though the stock price has dropped, resulting in a historically higher yield.

Accidental high yielders often occur in bear markets, when stock prices decline. Some companies may not remain accidental high yielders for long. In response to financial conditions, they could lower their dividend payments, thus preserving cash to weather any rough patches.

Accidental high yielders can prove attractive for investors who buy at depressed prices and then enjoy capital appreciation in addition to high dividend payments as prices recover. Purchasing a stock after a decline can lock in a higher dividend yield for the long-term.

However, buying a stock simply for the dividend yield should be avoided. The stock might continue falling, outweighing the benefit of the high dividend payments. This is called a dividend trap or a dividend value trap.

Accidental High Yielder and Dividend Yields

Accidental high yielder refers to a specific stock's dividend yield. A dividend refers to the portion of a company's earnings distributed to investors. Dividends are typically cash payments, but can also include stock dividends. A company's board of directors sets its dividend payment policy. It also decides the timing of payments, which are generally quarterly or monthly. Companies may also issue special dividends outside of this regular schedule.

A dividend yield measures the dividend as a percentage of a stock's market price. To calculate dividend yield, take the total per share dividend paid over one year and divide by current market price. Dividend yield is one tool investors use to measure the value of a company.

Real-World Example of an Accidental High Yielder

In 2019, BP (BP) paid $2.46 per share in dividends. In the final months of 2019, shares of BP traded for $38 each, for a dividend yield of about 6.5%.

In 2020, BP increased its dividend to $0.63 per quarter, implying $2.52 per share for the full year. But then the stock market and oil prices collapsed as a result of the COVID-19 pandemic, sending BP shares below $22.

As a result, BP was paying a dividend yield of 11.4%, nearly double what it had been previously. Because the spike in yield was due to a declining stock price and not a change in dividend policy, in this case BP became an accidental high yielder. However, the high dividend yield did not last long, as BP cut its quarterly dividend payment in half in August 2020.