Bob Sharpe: 7 Mistakes to AVOID When Dividend Investing
In volatile markets, traders tend to focus less on growth stocks and more on income-producing stocks. An investment portfolio focusing on dividends can provide more than income. It can improve portfolio stability, and avoid large losses over time.
That’s especially true when looking for dividend stocks capable of growing their payouts over time. However, not all dividends are created equal. And investors have just as many challenges to navigate in this environment as they do with investments like growth stocks.
For instance, when considering a dividend investment, look to the payout ratio. This number looks at how much of a company’s earnings are being used to pay the dividend.
A low ratio leaves the company with enough cash to reinvest and grow the business – and the dividend. A high ratio may leave the dividend susceptible to a cut, which tends to also cause the share price to drop.
Next, income investors should look to avoid yield traps. These are companies that have unsustainably high dividend payouts. A common stock that pays out a double-digit yield is likely a yield trap, although some REITs and MLPs may have such high yields.
Looking at a company’s financials can give you a clue as to a yield trap. Growing revenues and increasing income can be a sign that a high yield isn’t too good to be true.