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This idea of dividends sounds good, but chasing them can end poorly. Today, Devin is joined by Andrew Comstock, founder of Castlebar Asset Management, to talk about the pros and cons of investing in dividend-paying stocks.
On the surface, dividends seem great. But just because a stock is paying a high dividend doesn’t mean that it is a good investment to have in your portfolio. As Andrew says, “Chasing yield is like running with scissors. You may get to the destination, but it’s a heck of a lot safer to walk and follow the right way, as opposed to taking that risk for the opportunity to get there quicker.”
What Is A Dividend?
A dividend is a payment from the profits in a business, paid out to investors. Dividends are common in certain industries, like utilities and telecom companies. Investors often like dividends because they give you regular income, and many people have this perception that only quality companies can afford to pay dividends.
Some dividend stocks can be a good choice for your portfolio. The risk is with the high-yield dividend payers is that sometimes they’re paying out dividends by sacrificing some of the things that keep the company healthy and competitive. When you’re screening dividend stocks, you need to look beyond the dividend-yield ratio, and do more research into the investment.
Dividends aren’t guaranteed and even blue chip companies can and will cut their dividends when necessary. Would you still be happy to own the stock even if it stops paying dividends?
Also, you need to understand how dividends can impact the value of a stock. When you have a lot of people buying a stock solely because of the fact it is paying a dividend the price can go up, perhaps more than the stock is actually worth. Then, if the dividend is cut, those investors may dump the stock and make the price fall dramatically. If a company misses an earnings target, or faces another challenge, things can go wrong quickly.
Some risk in a portfolio is good, but you need to be sure you have the right balance for your situation. Dividends are not the only route to creating income streams with a traditional portfolio.
- How chasing dividends is like picking up nickels in front of a bulldozer
- How Real Estate Investment Trusts (REITS) need to be evaluated the same way
- Why Devin and Andrew should open a barbecue restaurant
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