Investing for the sake of dividends can earn you a bucket load of cash. You can even gain enormously without the need to sell your capital stock. But is this how the game runs for every dividend investor? The answer is not entirely friendly, as many who are new to the investment game lose their money to small mistakes and have to work beyond their retirement to make ends meet. This comes with severe headaches, and anyone will do whatever it takes to avoid these mistakes. We have taken our time to observe the most common dividend investing mistakes people make, and that’s what we want to share with you in this blog.
Investing In The Dark
Many beginner investors do make this mistake. They invest based on emotion more than they utilise their logic. Once they perceive a company to be good, they think it all means they can put in their money. However, emotion will lead you in the wrong direction, nine out of ten times. Therefore, one thing you always want to avoid when making decisions is your emotion.
The best way to drive away emotion and get your logic to do the work is to embark on detailed research of the stock you want to purchase. You need to put the earning report, debt, price stability, management, stock value, and dividend sustainability into consideration before you jump in and commit your hard-earned income. This will give you a good edge and a chance of making a reasonable investment.
Following Hints Without Clarity
Oftentimes, investors get advice from various sources. It might be a friend telling you to buy a stock, an authority figure they see purchasing a particular stock or a YouTube video that they watch. This causes them to purchase the same stock with the aim of getting the best result. But the tables turn the other way ninety per cent of the time.
This is the truth. Whenever someone gives a hint on a good stock, many people like you have seen it, and that might raise the demand and eventually the stock price. If you don’t analyse the chance of profit very well, you might end up in the deep sea of loss. In the same way, each person has a reason for buying each stock. This reason might not be apparent to you. So, it’s very important that you evaluate any stock buying advice you get to fit your personal goal before you make a leap to invest.
Going for the cheap stock
The difference between a wise investor and a poor one who will soon lose his money is the understanding of the distinction between cheap stocks and value stocks at a reasonable price. You need to understand this basic principle before you see stocks that have a good yield with crazy low prices, and you take it for a buy.
There is nothing more important than your cautious analysis of the reason behind the bottom rock low price that hit the stock. Sometimes, you might find out that the factor is not reasonable, and the stocks will soon pick up again. This is when you can head in. But in the case that the problem seems to be big enough to swallow the company, you already know what to do. You won’t know all these unless you put off your emotion and do your due diligence.
Falling into the dividend trap
In the course of trying to get the best possible return on investment, some investors find themselves in what we call the dividend trap. A dividend trap is a situation where an investor decides to buy into a stock because of the high yield of dividends the company pays. The fault in this is that a high dividend rate is usually caused by a fall in the price of a particular stock, which can mean that the company is in a market struggle.
For example, if a company pays five dollars on each stock of 100 dollars in price as a dividend when the stock price drops to 70 dollars, they will most likely keep the dividend payment at 5 dollars. This naturally implies an increase in yield from 5% to about 7%, which is high. But the problem is that the likelihood of the company keeping up with the yield in the face of the market struggle is very low. So, the yield will soon fall beyond expectation.
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Instead of looking for the highest dividend rate, what investors should look for are companies that have an increasing record of performance and dividend yield, even if it’s not huge. This can help secure your capital while you earn your passive return consistently.
Not knowing the right time to get out
Yes! Investment is like a moving ship. Those who know the right time to get in and out of the ship will sail to financial freedom, while the rest may soon find themselves under the water. You should stay in as long as the ship is safe, and once the hope of floating is gone, the best thing is to find your way out as soon as possible. This is more about investment than it is about the ship. A lot of investors don’t know the right time to buy and sell a stock, and this leads to losses beyond control. When a stock begins to drop, and the chance of getting over the fundamental cause is zero, like a sinking ship, the best way to minimise your loss is to sell and invest in a profitable stock that will give you the security and stability of dividends that you want.
In conclusion,
Investing, whether in dividend or growth stocks, can be profitable if you know the right way to play the game and which silly mistakes to avoid. Once you can put in your time and effort to research and evaluate a stock based on essential metrics, you can build your investment from a boat to a ship that will sail you to wealth without sinking.
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Recommended books for further reading:
- Shares Made Simple: A beginner’s guide to the stock market
- Smarter Investing: Simpler Decisions for Better Results
- How to Make Money in Stocks: A Winning System In Good Times And Bad
- The Barefoot Investor: The Only Money Guide You’ll Ever Need
- Rule #1: The Simple Strategy for Successful Investing in Only 15 Minutes a Week
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