Walk into any online forum or financial news site, and you don’t have to look hard to find stocks, funds, and private credit opportunities promising huge yields. Anything that offers a return significantly above the —currently around 4.25%—is often touted as a “big” yield.
The attraction is obvious. A 10%, 11%, or even 12% annual yield seems like a shortcut to beating the S&P 500’s long-term average return of 9-10%—all without the stress of trying to time the market. Even a high single-digit yield of 7% or 8% can seem appealing, as it promises to deliver a huge chunk of the market’s return simply by cashing dividend checks every quarter.
But here’s the problem: this strategy is a classic “stupid investment trick.” While a company’s dividend yield can remain high on a percentage basis, the underlying stock’s value can fall dramatically. This capital loss can wipe out any gains from the dividend income, leaving your portfolio in much worse shape than when you started.
Let’s look at a real-world example of why chasing yield can lead to a financial disaster.
In January 2010, , a real estate investment trust, was trading at $69.64 per share. Over the prior 12 months, the company paid a dividend of $10.16, giving it an eye-popping yield of 14.6%.
Fast forward to the end of 2024. The company was still paying a large dividend, but the share price had plummeted to $18.30. The annual dividend for the prior 12 months was just $2.60. An investor who “chased the yield” saw their principal investment decline by 74%, and their annual income from that stock also dropped by 74%.
This example highlights a crucial point: yield alone is not enough.
What truly matters is total return—the combination of the yield plus any capital gain or loss. Capital gains are driven by a company’s growth, which can be hard to achieve when a business is forced to pay out a huge chunk of its profits in dividends every quarter.
This is why an exceptionally high yield, especially one far above the 10-year Treasury rate, is a major red flag. It often indicates that a company is paying out more than it can sustainably earn, which can stunt its growth and cause its share price to slide.
While dividends are a key component of a successful investment strategy, an absurdly high yield isn’t a gift—it’s often a warning sign. When someone pitches you a stock or fund with a sky-high yield, your best move is to run the other way.