Dividend stocks are one of the best ways to build your long term wealth.
The decision-making is the thing that makes it difficult. You have to pick the right one to invest in.
How? You can steer clear of companies whose payouts are on their way off a cliff, for starters. You should also avoid these 4 mistakes. Though if you’ve made any of them, don’t worry too much about it. You just have to remember them and avoid making the same mistakes all over again.
1. Focusing on Yields Alone
When people begin investing in dividend stocks, they tend to go directly to the high-yield stocks. Don’t let yield be the major winning factor for you when choosing your investment. A high-yield stock can also be an indicator of trouble as much as an indicator of big profits. It mostly depends on the industry you decide to invest in.
It is mostly better to choose a company with lower-than-average dividend but is experiencing solid growth. Having a consistently increasing dividend but smaller company can be better than one with a larger yield but is stagnant.
2. Looking at the Present rather than Future Dividend Stocks
When looking up a stock’s dividend, you’re looking at its current dividend. A company’s present dividend is the equivalent of yesterday’s news.
This is relevant because the present one will be the money you earn this year. But looking at it as an investor, you should be more interested in its growth potential for the future.
Read more about the basic terms and strategies of dividend stocks.
There is no one certain way to know how much a company will pay in dividends in the future. Still, there are some things can help you make educated guesses: the company’s recent and long-term trend in raising dividends; management’s income projections; and any important developments that can possibly affect the company’s past trend of free cash flow.
3. Buying Solely Because the Stock is Cheap
The difference between making and losing money can be seen with knowing what low share prices and good values are. It doesn’t automatically mean that if a stock is cheap, it’s a bargain. Solely basing on this factor is already considered betting and no longer investing.
You should first do careful research on the cheap stock’s company fundamentals. It can take time considering that finding information for these low-priced companies are harder than the large and higher-priced stocks.
4. Relying Too Much on Media Reports and Analysis
Media like financial newspapers and magazines, websites, and investment TV and radio shows are great sources but not always right. This is because they mostly rely on company insiders for information.
Here some things you should probably remember about media sources:
- Monthly magazine articles about investing are usually written 2 months in advance. This means that there could’ve already been radical changes that could render the information out-of-date.
- TV financial personalities are mostly analysts or commentators second. They are entertainers first and foremost.
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