Do you also believe these Dividend Investing myths?
1. Ex-dividend vs Record Date
Many investors use these 2 terms interchangeable and assume that they are the same date. However they are not.
If an investor owns a stock before the ex-dividend date, they will receive the dividend. Since the ex-dividend date is usually two business days before the record date, an investor needs to understand the difference between the two.
2. Stock prices drop whenever dividends are paid
Most investors assume that stock prices drop when dividends are paid out to shareholders. Hence they will treat such situations as a potential chance to start investing in their desired stocks.
However, that is not the case.
Stock prices tend to dip on the ex-dividend date rather than on the dividend payment date.
Also, you might want to note that often times these dips may not be very obvious. Especially if the dividend payout is a small or negligible amount.
With larger companies who offer bigger dividends, there may be a noticeable dip in the stock price.
These dips merely help to balance dividend payouts. They usually do not signify a strong reason to invest in a stock.
Do make sure that your reason to invest is valid.
3. Dividend Stocks Are Always Safe
There will always be some level of risk associated with all types of investments, even dividend stocks.
Investors generally feel that dividend stocks are safer as they assume that the dividend payout they receive can help to cushion the drop in stock prices that it may experience.
However there have been instances where dividend stocks were not able to sustain their dividend payout the moment their share prices start declining.
The dividend payout and yield should never be your main reason to invest in a dividend paying stock.
Chris Ng shares how he selects for safe and sustainable dividend paying stocks, and how you can start earning your first dividend cheque this year, at his free ERM masterclass.
4. Special Dividends Are Great
Special Dividend payments may appear attractive. However, investing in of these stocks just before their ex-dividend date will only result in the stock price being negatively adjusted.
For example, if a company offers a $10 one-time dividend, the stock price will usually decline by $10 on the ex-dividend date. So it balances out after the dividend payout.
This means that as an investor, you are paying a premium when you invest at this period. If you are lucky, the premium will be paid out to you in full via dividends. However, there are cases where the price runs above the dividend payout amount.
Regular dividends show a stockholder that the company has a long-term commitment, unlike special dividends, which are one-off events.
5. Highest Yielding Stocks Are Always Best
High-yield dividend stocks may sound profitable and attractive. However, as mentioned in #3 and #4, these companies may not be able to sustain their payout.
As an investor, do seek out the reasons for high dividend payouts. Is the company doing this just to attract shareholders? Is the company eating into its cash reserve to fulfill its dividend payouts?
6. Dividend Stocks Do Not Fluctuate Much
Although there are many examples of dividend stocks with stable prices, do remember that just like any other stock, these stocks are still exposed to market factors. Their share prices do fluctuate.
It is important for you to track your investments and do a check frequently to ensure that the reason for investing in the stock still exsits.
7. Dividends Are Guaranteed
It is not compulsory for listed companies to distribute dividends to their shareholders. Plus, these companies have the right to modify their dividend payouts whenever they see a need to.
This is an important characteristic to take note if you want to build a portfolio that pays out dividend regularly.
8. Cheap Dividend Stocks Are Better
Often, buying bargain stocks are not a smart move. There is usually a reason for their share price.
If an investor is looking for low risk, dividend stocks then cheap stocks are usually not the best choice. A healthy dividend stock would be a better and safer choice.