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3 HUGE Dividend Investing Mistakes to Avoid - YouTube
Channel: The Motley Fool
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hey there I'm Kirsten from the Motley
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Fool and in this FAQ we're going to go
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through some of the biggest mistakes
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dividend investors make and how to avoid
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them
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generally dividend investors are looking
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to generate income by owning stocks that
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pay them cash so it would stand to
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reason that they should generally focus
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on the companies that pay them the
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highest amount in dividends relative to
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the dollars they invest there's a metric
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that tracks exactly what an investor
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will get per dollar of stock bought in a
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company it's called yield and it can be
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helpful but also misleading you see
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yield is calculated by taking a year's
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worth of dividend payments and dividing
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it by the price you have to pay for one
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share in the company seems pretty
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straightforward but like any metric
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created by division yield can go up for
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two different reasons one the dividend
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payments increase awesome or two the
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stock price decreases not so awesome
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let's show this off in practice say one
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share of a company costs $10 and it pays
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50 cents in dividends over the course of
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the year that would give the stock a
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yield of 5% which is pretty great if the
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stock price dips to $5 the yield on the
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dividend payments would shoot up to 10%
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but investors that owned the stock would
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be down 50% on the money they originally
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invested bargain hunters that are new to
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the company might look at the stock
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that's fallen so far and say why not buy
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shares I can get a 10% return on just
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the dividends this is called chasing
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yield and it can ruin investing for
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beginners stocks that have been cut in
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half or often on sale for a reason
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there are major business issues they
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need to address often a company's
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dividend policy will slightly lag its
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business results so even if the company
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posts bad financials that spell doom and
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gloom in the future its dividend will
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remain intact for another couple of
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months and remember yield looks at what
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the company is paid over the past 12
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months in dividends not what it will pay
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in the future for all these reasons you
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need to look at the company's yield but
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also the overall strength of the
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business that's paying the dividend
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that's a far better indicator of whether
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or not those
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dividend payments will stick around one
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more handy metric to look at is payout
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ratio it takes the total amount the
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company pays and dividends and divides
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it by net income if the metric is over a
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hundred percent it means the company is
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paying out more than it's bringing in
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which isn't sustainable over the long
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term and a sign that the company's
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dividend could be cut soon the right
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payout ratio varies by company and
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industry what you want to avoid is
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buying companies that have had their
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payout ratios spiked Tuen usually high
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levels by the way if you want more info
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on how to analyze dividend stocks head
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over to fool.com slash payme where we
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have our free dividend investing guide
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complete with three stocks to get you
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started ok back to the show with our
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second dividend investing mistake
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getting too fancy too fast there are
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certain kinds of stocks that tend to
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have above average dividend payments
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giving them great looking yields
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compared to other companies I'm talking
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about wreaths or real estate investment
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trusts and MLPs master limited
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partnerships and the reason these kinds
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of businesses generally pay high yields
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is that they are given favorable tax
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treatment because they pass most of
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their earnings along to their
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shareholders owning these kinds of
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companies can be a great way to collect
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dividend income if you know what you're
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doing the problem is that they are
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different than your standard company and
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need to be evaluated with industry
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specific metrics to see how they truly
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stack up and when it comes to tax time
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dividend payments from these businesses
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are generally treated differently than
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those from your average company for
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these reasons it's important to do your
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homework on special structure businesses
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before jumping in and buying shares if
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you want some help doing that head over
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to our REIT center we've got a link down
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in the video description if you're
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buying dividend stocks what you're
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really doing is investing the best way
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to put your money to work for you is to
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put it into quality businesses with long
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term competitive advantages there are
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dividend pairs that might not have the
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highest payments but have proven to be
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wonderful investments for people who
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want to see their money grow and be paid
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dividends in the process for example in
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the beginning of 2018 shares of Apple
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had a dividend yield of less than 2% so
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it might have flown under the radar of
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dividend hunters
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but over the two years that follows the
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price of the stock shot up 70% investors
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that own shares enjoyed seeing their
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accounts well and value and they got
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paid to watch the point is even if
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you're buying a dividend stock you're
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still buying shares in the company and
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the best way to do that is by focusing
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on growing businesses with market
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leading positions those are the kinds of
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companies that will stick around for the
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long term and reward their shareholders
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with share price growth and dividend
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payments along the way okay so to recap
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dividend investors should avoid chasing
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yield start out with simple businesses
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not ones with more complicated
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structures and focus on the whole
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business not just the payment and again
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we have way more dividend tips and our
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dividend investing playbook and it's
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free just head over to fool.com slash
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pay me to get our dividend investing
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guide it comes with three income
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generating stocks to get you started we
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want to know which dividend stocks
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you're watching drop them down in the
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comment section below and if you haven't
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already hit that thumbs up button to
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like the video it tells YouTube we're
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doing good stuff over here and so does
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subscribing to our channel it's free and
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it keeps you up to date with all of our
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investing content here on YouTube
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that'll do it for this FAQ until next
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time fool on
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