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:
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.
- 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.