Why "high dividend" sounds safe
Paid investing courses often sell high dividends as "safe passive income". The logic is simple: the company pays you every quarter, whatever the price does. We checked whether the highest dividend really is safer.
What we did
- Every S&P 500 stock, every month since 2016, split into five groups by dividend yield, plus the companies that pay none.
- For each group: how often the stock lost more than 30% over the next 12 months, and how often the company cut its dividend.
- The rules were written down in advance and checked in two separate periods: 2016–2021 and 2022–2026.
The result: the highest dividend is riskier
- The highest-yield fifth lost more than 30% in a year about twice as often as middle-yield payers (2016–2021).
- About 1 in 6 of them cut the dividend within 12 months (2016–2021); in 2022–2026 about 1 in 11.
Why: the dividend yield rises when the price falls. Some "high dividends" are simply companies whose shares are already falling because the market doubts they can keep paying. The difference against the other payers is not statistically certain, so we say "about twice as often as the middle", not "proven riskier".
Covered calls
The strategy: you hold the shares and sell someone the right to buy them from you at a higher price. You get a premium every month but give up most of the upside. Funds such as XYLD and QYLD do exactly this.
| S&P 500 | Yearly return |
|---|---|
| Selling covered calls (BXM index), 1988–2026 | 8.9% |
| Just holding (with dividends), 1988–2026 | 11.5% |
| Selling covered calls, since 2007 | 6.0% |
| Just holding, since 2007 | 10.7% |
Source: CBOE indices ^BXM and ^SP500TR; Trading Toolbox calculations (study 46).
In the strategy's favour: the ride is smoother, with smaller swings and shallower drops. But you end with less money. The monthly income is not a gift: you pay for it with the upside you give up.
What this means for you
- Do not pick a stock for the highest dividend alone. Check whether the company earns the cash it pays out: cash flow, debt, and whether the dividend has been cut before.
- If you are considering a covered-call fund for its monthly income, compare it with just holding the index over the same years: since 1988, holding left more money.
Frequently asked questions
Are high-dividend stocks safe?
Not safer than the rest, by our data. The fifth of S&P 500 stocks with the highest dividend yield lost a third of its value about twice as often as middle-yield payers, and about 1 in 6 cut its dividend within a year (2016–2021).
Are covered calls worth it?
They give a smoother ride but less money: 8.9% a year vs 11.5% for just holding the S&P 500 (1988–2026), and 6.0% vs 10.7% since 2007.
Why are the highest dividends riskier?
The dividend yield rises when the price falls. Some of the highest-yield companies are those whose shares are already falling because the market doubts they can keep paying.
What is a covered call ETF?
A fund that holds the stocks of an index and sells options on them every month. It collects a premium, paid out as income, but gives up much of the upside. Examples are XYLD (S&P 500) and QYLD (Nasdaq-100).
Sources
- Our tests: study 46 in the Trading Toolbox research log (S&P 500 stocks, 2016–2026, rules written in advance)
- CBOE: the S&P 500 BuyWrite index (^BXM) and the S&P 500 Total Return index (^SP500TR), 1988–2026
This page is educational and not investment advice.