Investing In Dividend Stocks
Some investors swear that stocks that pay dividends are the only way to invest, and they may not be wrong.A company that pays a dividend is generally fiscally sound and able to split off some of its profits to its stockholders.Those companies usually have a dividend reinvestment program where the dividend can be used to purchase more stock in the company at no cost to the stockholder.
Unless a company is doing something really weird to cook its books, any company that pays a dividend is having a profitable year.They may raise the dividend, but they are loathe to lower the dividend because that would signal to investors that something went wrong financially with the company during the year.Lowering a dividend or stopping it altogether does happen, even to the best of companies, so it is important to understand what circumstances caused the company to drop its dividend.
A dividend can be as much as five percent, but most often hovers around the one percent mark.What is important for investors to realize is that when that dividend is reinvested, it faces the same risks and benefits as the rest of the company.If the company does well and the stock prices go up, the dividend intrinsically becomes worth more than what was originally paid.The other part about a dividend is that giving enough shares of dividend paying stocks, the investor can build a passive stream of income, which becomes important to the retiree.The more passive streams of income, the less the retiree has to worry about money during retirement.
The problem with companies that pay a dividend is that the dividend is entirely voluntary.They can be paid or not paid at the whim of the company.Generally speaking, things don't happen that quickly, but it can be frustrating to be holding onto a stock when it announces the lack of dividend payment, especially since that announcement usually signals a decline in stock price.
There really is no way to mitigate that type of possibility because even the best companies can find themselves in unforeseen financial straits that require them to retain the dividend for company reinvestment purposes.This means that the investor needs to make a decision - is the company worth holding on to?
The answer to that question can be complicated depending on where the stock price is in regards to the investor's purchase price.It is hard to get rid of a stock as the price falls because there is always the hope that it will go back up if one just holds onto it long enough.Looking at it that way is a red herring though.Making a quick decision to sell the stock may actually result in a short term loss, but it brings in money that can be used for a better investment.That means that the opportunity costs could be quite high for holding onto a possible future dividend and return to prominence of a stock.
Ego also plays into the scenario.No one likes to be wrong, and this is true even in the case of purchasing stocks.A stock purchase is an educated guess, in which the person literally makes an investment.If this investment includes an emotional component, it becomes hard to get rid of a loser stock pick.The person may wonder how he or she could have missed so badly and may rationalize that the loss isn't that bad until it is catastrophic.Taking ego out of the equation and trading stocks logical may help mitigate this particular problem and save the investor money.