Dividends Do Lie Sometimes

With interest rates at historical lows there’s lots written about how to increase the return on your investments and cash. One of the hottest topics is investing in dividend stocks for income. Now, don’t get me wrong, I like dividends as much as the next person, but they are not without their flaws. The following is a guest post by Barbara Friedberg, editor-in-chief of Barbara Friedberg Personal Finance.com.

The Down Side of Dividends

I just checked the price on a long time holding of mine, Nokia (NOK). After dropping in price 7.62% yesterday, the price is $6.42. At this price, the dividend of $.57 yields a return of 8.78%.

Hold on, before you jump in for the 8.78% dividend, listen to my story.

Do Not Do What I Did

Here’s the tale of the Nokia shares I purchased:

2005-$15.00

2007-$30.00

I spent a lot of time researching and evaluating the stock before each purchase and the prospects at the time of purchase were good. In fact, I was proven right as the stock price rose to $40.00 in 2007.

You’re probably thinking (as I am), Barb, you should have sold in 2007 for $40.00. Of course, I should have, but that’s the topic for another article.

Between 2005 and 2011, the dividend yield has bounced around from a low of 1.5% to a high of 8.1% as the payout went up and down.

The Takeaway

  • Share prices bounce around.
  • Dividends go up and down.
  • Stock ownership is owning a piece of the company.
  • Every company has its successes and failures.
  • There is no such thing as a “sure thing.”

Dividends are wonderful if they keep going up and the underlying share price remains stable or increases. Unfortunately, even after judicious research, stock prices fall and dividends are cut. Approach investing with the understanding that although over time, the direction of equity prices and dividends has been positive; there are bumps along the way.

Barb is a portfolio manager, MBA professor, and writes to educate, inspire, and motivate for wealth in money and life. Stop by her site to pick up a free copy of her eBook 20 Minute Guide to Investing.

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11 Responses to “Dividends Do Lie Sometimes”

  1. Have you looked at the payout ratio of Nokia? Can they continue to afford to pay?

    • avatar Mark says:

      Robert,

      I don’t think there is anyway that the company can keep up the dividend. They aren’t even sure what their earnings are going to be this year.

  2. avatar optionsdude says:

    I would certainly be wary of investing in Nokia now. I did the same with Worldcom and we all know how that turned out. That is what caused me to seriously look at using protective puts. To me, it is worth the protection to prevent watching a stock decline like this. I know that I lack the discipline to sell but the put options protect my capital and protect me from myself and hoping for a rebound.

  3. avatar Buck Inspire says:

    I’ve been hearing a lot about dividend investing. Thanks for shining the light on the possible downside. Are you still holding on? Looking forward to your follow up article!

  4. I know that many people fall into the trap of chasing yield, without every performing a proper analysis of the company. Your experience highlights the fact that a high dividend yield can be a sign of a stock that just experience a terrible, and often justified, fall.

  5. @Options-I certainly agree, when a stock has unclear earnings, future, and growth prospects, any investment is quite risky. A protective put would have been a good idea….:)
    @Buck-Dividend investing, like any other stock investing has it’s risks. Dividends are nice, but when the stock price drops and you sell, you still loose money.
    @Khaleef-If something looks too good to be true, you better do a lot of homework before investing.

  6. Has any one bought shares in WaMu or city in 2007/early 2008? Well I did, I will write about the biggest monetary mistake of my life someday on my blog

  7. Thanks for this article, Barb. I’m trying to learn all I can about dividend investing and this is one angle that hadn’t occurred to me.

  8. Good post Barb. It’s easy to forget that every business, like the economy, goes through cycles. Nothing can go up forever, which is why we’re supposed to diversify and hold on to investments for the long term. At least that’s what I was taught. I realize after reading this that I have a lot to learn about dividend investing!

  9. It’s true that dividend paying stocks are constantly touted as the best way to generate a steady stream of income but they also come with a risk. Decreasing share value!

    Sorry to hear about Nokia, but the recession really hit every company hard. The only problem is, with the smart phone trend do you see Nokia coming back as a true competitor? I don’t think they’l ever be able to regain that market share they once had.

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