The 3 Biggest Mistakes That Dividend Investors Make
Investing in the right stocks is such a thrill!
Nothing beats the feeling of watching your stock surge upwards, making you some tidy gains in the process.
And investing in the types of stocks that pay dividends over and above this, is the best way to build proper wealth and construct a solid portfolio.
The thing is though, novice investors looking for that very feeling tend to jump straight in!
And they do so without knowing exactly what it is they’re jumping into.
With that comes the mistakes that they could so easily have avoided.
And boy have I seen those time and time again.
I’ve noticed that newbie investors tend to make 3 specific mistakes when it comes to investing for dividends.
That’s why I want to reveal what these mistakes are so that you don’t have to make them!
Avoid These Deadly Dividend Mistakes
Dividend Mistake #1: Being Seduced By Yield
One thing some investors do when looking for solid dividend paying stocks is get seduced by a high dividend yield.
In fact, they get so drawn in by this that they tend to forget other important aspects and factors, like earnings, profitability, a business’s overall health and all the things that make the company actually worth investing in.
The problem is that chasing a high yield can end in disaster if the company’s fundamentals don’t match its ambitions.
All the dividend yield essentially tells you is what percentage of its share price a company pays in dividends.
The higher this percentage, the higher the dividend payment is in relation to the company’s share price.
The dividend yield is probably the most used ratio when it comes to dividends, but you need to look further than that…
You need to check if a company's dividends are actually sustainable, not just get drawn to the biggest yield like a moth to the flame.
In most cases, a very high dividend yield suggests a company won’t be able to sustain the payment at this level, and that they have less money to fund new opportunities or conduct research and development.
These reasons alone make it harder for a business to maintain any form of consistency and growth.
That’s why you want to look for companies that have solid financials and have a solid track record of paying consistent dividends.
Dividend Mistake #2: Forgetting About The Right Return
You need to track the right numbers.
Dividend yield and total return describe the performance of a stock.
But what some investors seem to do is forget about the total yield entirely.
You need to take both into account before investing in a dividend paying stock.
Dividends are a fantastic way to get paid twice by a surging stock, without ever having to put in more money.
And if you reinvest your dividends, you could compound your returns by getting paid dividends on your dividends!
The problem is, as I’ve described above, the dividend yield can be misleading.
A dividend yield could signal strength when in the background the company is actually operating at a loss.
Believe me, this happens...
Total return however, is a measure of how much the investment is making for the shareholder and takes into account interest, dividends and increases in share price as well as any other changes in capital gains.
Total return is a fuller number, and one that tells you a better, richer story.
And as an investor, it’s those richer stories that help you make the best investment decisions.
Total return is a useful measure to get a complete picture of how a dividend paying stock has performed, and you get a better idea than if you had just focused on yield alone.
Dividend Mistake #3: Not Paying Attention To Investments
One thing I love about dividend investing is that at the end of the day it’s actually fairly simple.
All you need to do is keep focused, pay attention, and track your investments!
Sure, even solid companies run into trouble.
You can never guarantee yourself a return on any of your investments.
This is the stock market remember?
What you can do in situations like these is capitalize on the opportunities when they present themselves!
And if you’re not paying attention, you’ll miss out, or worse yet your investment could tank!
The best part about fundamentally sound companies is that every time they suffer a setback of sorts in their share price, there’s an opportunity on the table for you.
It represents a discount for you as an investor.
If you’re tracking your investments, and come across opportunities like these, you can simply buy more shares at a discount and really leverage your money in the long run.
That’s why not keeping track of your investments can be a simple, yet silly mistake to make.
You’re wiping potential profit off the table.
How To Become A Better Dividend Investor
Investment mistakes are easy to make.
Especially when you can see them coming from a mile away.
Problem is, most investors don’t.
That’s why if you can avoid these 3 dividend investing mistakes, you will become a better, more profitable dividend investor.
Don’t get seduced by a high dividend yield.
It’s not always a tell-tale sign you’re investing in a solid, consistent dividend paying business.
You need to track total return, and not just look at a dividend yield.
Doing so will give you a clearer, richer, fuller investment picture.
And lastly, track your investments!
Both opportunities and tricky trading traps might pop up, and you either want to avoid the traps or take advantage of the opportunities.
By tracking your investments, you can do this.
So, next time you decide to invest for the dividends remember these three mistakes.
Until then, here’s to profitable investing.
The Money Lab