The world of investing is one in which you can never fully eliminate the risks, as many new investors are quick to find out. However, by making better decisions and, more importantly, avoiding bad ones, you can minimise the level of risks that you take.
Here are some suggestions for improving your odds of building a sustainable dividend portfolio.
1: Focusing Too Strictly On Yield
New investors often have the misconception that investing in high-yield stocks is the safest move. This is not always the case, and in fact, sometimes the fact that a stock is high-yielding can be a warning sign as easily as it can be a sign of potentially high profits.
Focus on a company’s prospective growth, rather than on current stock yields. Frequently, the most reliable stocks are those of companies that are experiencing strong growth while consistently increasing its stock dividend.
2: Putting More Emphasis On Current Dividends Rather Than Future’s
A stock’s current dividend is important because it indicates what you’ll be paid this year, but when it comes to investing, focusing too much on it is akin to reading yesterday’s news. You should be more interested in a stock’s potential to grow, rather than what it is currently paying.
Although it’s impossible to know exactly how a stock will perform without fail, it is possible to make an educated guess by considering current and long-term trends for raising dividends, the company’s income projections, and any developments that could improve the company’s free cash flow trends.
You’re better off investing in a company whose shares pay lower dividends when the company demonstrates a lot of potential for improving its dividend payouts going forward, rather than investing in a company whose stock performance remains static
3: Failure in Monitoring The Market And Your Stocks
Most likely you tend to make safer investments than Wall Street speculators and growth investors do, focusing your money on well-managed companies with proven track records of paying good dividends. However, this doesn’t mean that you can lose sight of how your investments are performing. Remember, even large companies that have been around for decades can fail, think Lehman Brothers, Chrysler, and Bear Stearns.
4: Giving Too Much Weight to News and Analyst Reports
There are an abundance of financial newspapers and magazines, investment television and radio shows, and websites. All of these can be outstanding sources for information, but they are not always reliable because they depend on information provided by company insiders. If you should have learned anything following the financial sector meltdown of 2008, it’s that you can’t always trust what you’re told.
Never assume that a source is completely reliable. Your best source is the company’s financial documents, followed by the media. Always verify the information that you receive regardless of the source by comparing it to other sources, and don’t over-look your own instincts and insight.
5: Buying a Stock Based on Hot Tip
A hot tip can come back to burn you if you’re not careful. Think of them as tips to follow up on, then do your research. This means pulling the financial data for the company for the year and crunching the numbers to see if the tip makes sense to you. Also, check to see if any insiders are investing in the stock, and even consider speaking to company representatives to get a better gauge of the company’s direction for the future. Don’t rely on the word of a broker, colleague, friend, or relative.
You’ll make fewer investment mistakes by following these common-sense suggestions. There is always some degree of risk, but minimising your risks will give you the best chance of achieving all your investing goals.
Case Study: Rickmers Maritime (B1ZU)
It was once a 10% high yielding stock. Now it has proven to be a trap. Trading has been suspended since Nov 2016, as the company was “unable to demonstrate that it is able to continue as a going concern”. Rickmers defaulted on an interest payment of $4.26 million to bond holders. Kyith from InvestmentMoats has written a detailed piece about it. You can read it here.
Many investors who invested in Rickmers made the 5 mistakes being highlighted in this article. We hope investors will learn from such events and be more mindful of the way they approach on dividend investing.
How to pick out safe and sustainable Dividend Stocks?
Chris Ng built a dividend income that allowed him to retire early at 39, he shares how aspiring dividend investors can do it in today’s markets. Join him at his upcoming webinar