Stock market analysts and investors frequently take sides when it comes to the topic of dividend stock investing. There are the cheerleaders on one side who think dividend stocks are basically the next best thing to having free money.
Then there are the naysayers on the other hand who think that dividend stocks are the worst thing after a government takeover. There is a tendency for the truth to be somewhere in between these two views.
In this article, we will be debunking the four most common misconceptions and myths regarding dividend stock investing to give you a more balanced view on the matter.
Myth 1: Dividend Investing Is Just For Seniors or Retired People
Admittedly, dividend investing is very attractive for seniors, since typically their investing goals are income generation and capital preservation. However, younger investors also want the benefits from the dividend stocks, even when their portfolio value might not be as big compared to the seniors.
Seniors might want to stick with well-established, large corporations, while younger investors might want to focus more towards the lower to middle end of entire dividend spectrum.
For younger investors that want growth stocks, they should purchase up-and-coming yet established companies that can pay small dividends yet still show they have lots of growth potential as well (in both dividend payments and capital appreciation). Okay, this is easier said than done. But that’s another story for another time.
Myth 2: Dividend Stocks are Safe Form of Investments
Now matter how you look at it, investing is risky. There is always the possible risk that you will lose money. However, there are some investments, which include dividend stocks, which have a tendency to be safer compared to others. The reason why I say that they have a tendency to be safer is because even investments that are traditionally safe can end up taking a hit. For example, in 2009, real estate and financials, which for a long time had paid very reliable dividends, ended up going into a tailspin.
Myth 3: The Company’s Growth is Limited by Paying Dividends
Growth investors frequently argue that it would be better for companies that pay dividends to use that money in order to fuel further growth. In certain situations for some companies, this suggestion might be the case, however the reasoning is only valid if the money is spent well.
Companies that do not pay out dividends provide their managers with unrestricted use of their profits. Frequently corporate executives start projects or make acquisitions to increase their own personal wealth (through reputation and bonuses) instead of boosting shareholder value.
Quite often big results are often promised by risky acquisition outside of the main business of a company and frequently end up being money pits. In the meantime, when there is a commitment to pay dividends it helps to keep management honest.
When a company knows it needs to generate a specific amount of cash flow every quarter in order to pay shareholders their dividends has a tendency to motivate management to be effective in their management. Paying dividends also means that management has less capital to waste on risky business ventures. What this means is that management is require to more carefully evaluate potential business ventures.
Myth 4: Invest In High-Yield Stocks at All Times
A stock should not be judged by only yield. Yield does provide a valuable measure for how much bang you are receiving on your investment bucks, however by itself it doesn’t determine what the true value of a stock is. It is also necessary to consider the share price. A minimum yield can be used for screening stocks out that fail to meet your personal income requirements. However, before you invest, a company’s fundamentals should be carefully evaluated.
Having high yield could signify certain situations – some negative, some positive. High yield might be a sign that the share price of the company has sunk and that it could be struggling. If a high yield stock is out of sync with its sector, this might be a sign that a dividend cut is impending. However, low-yield stocks should not be immediately written off.
Are you investing in dividend stocks? Do they work for you?
Yes? No? Not Sure? Well, Dr Wealth’s Portfolio Tracker tracks the dividends of Singapore stocks. You will be able to immediately see how much dividends you have made over the years. And if your dividend stocks have been doing as well as you think. Download it here.