Dividend investing pitfalls
Published 12.01.2022 в Analyse forex euro franc suisse
Many investors love the income stream that dividend stocks provide. While there are advantages to owning dividend stocks, there are pitfalls. 1. Succumbing to the allure of a high yield · 2. Not investing for the business first and the dividend second · 3. Mismanaging expectations. How dividend investing strategies can potentially help investors improve their portfolios. funds and avoid pitfalls that can result in underperformance. SILICON INVESTOR VALUE INVESTING SOFTWARE
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Take, for example, a real estate investment trust called Macerich MAC that invests heavily in shopping centers. In March of , MAC shares offered a 4. Altogether, BAC shareholders average an annual return of around But the next important question becomes whether there are other stocks that could make you more money in the same time frame.
Considering that PayPal has enjoyed a five-year growth of When picking a stock, be sure to look for more than just a high dividend yield. Does it tend to be volatile, with large surges and plunges, or is it stable? If it appears stable, does it look a little too stable with no room for growth? Innovation: Does the company have a reputation for developing new and innovative products? Is the company a leader in its industry? These three key factors don't really jive with dividend investing—bringing us to the next three problems.
Cost On average, keeping your investment costs low is the key to scoring the best investment return opens in new tab. When you pay less to invest, you keep more money for yourself. The math is pretty simple. Image credit: iStock People who focus on dividend investing tend to ignore ongoing costs. A dividend-centered investment fund a mutual fund or exchange-traded fund is almost always more expensive than a broader, more-diversified fund.
Let's use these two examples as a basis for this argument: iShares Select Dividend ETF expense ratio opens in new tab : 0. And this comparison assumes you're buying low-cost funds to begin with. Obviously, the price difference might be even worse if you're opting for the expensive active-management route. Over time, these added costs will chip away at your earnings.
So, you may be receiving dividends, but you're paying a lot more money out than those dividends are worth. Diversification The value of diversification is so ubiquitous that I'm sure you've heard this before. Still, it bears repeating that you should never put all of your eggs in one basket.
When you focus your investments on those companies that pay dividends, you're doing the opposite of diversification: you're concentrating your investments into just one type of company. This makes your investments riskier. So, if you think dividend investing is a safe strategy, I would caution you.
Focusing on dividends can be very risky. Let's not forget that it was the very same euphoria for dividend-paying companies that caused a stock market bubble and poor stock market performance of the s opens in new tab.
Performance Chasing Studies continue to demonstrate the value of sticking with buy-and-hold investments opens in new tab. The gist of these studies is this: Over time, investors who buy and hold long-term investments, and specifically low-cost index funds, earn more money than investors chasing the latest investment trend. The recent popularity of dividend investing is no exception.
If you think you're the only one investing in dividends, think again. Trust me when I say everyone and their grandma is doing it, and countless people are blogging about it, too. It's only a matter of time until the dividend bubble follows the gold bubble, real estate bubble and tech bubble of previous generations. Taxes The final problem with dividend investing is that it comes with hefty tax consequences. Even if you're holding your dividend-paying investments longer than one year to get better tax treatment , you're still paying taxes every single year.
This hurts your investment returns. Each time you receive a dividend, you get a tax bill. Companies that reinvest their profits are able to give you an investment return without an immediate tax consequence, but that doesn't mean you won't eventually pay the piper. Check out the chart below to see how taxes might drag down your performance over time: Image credit: iStock Remember, your tax bill matters more than you think opens in new tab.
And over time, more taxes coupled with higher fees and less diversity means less money in your pocket—not more. Today's Valuations Simply put, valuations measure how expensive or cheap something is—and they're even more important than taxes.
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