DIVIDENDS ARE NO GOOD IF YOUR STOCKS KEEPS GOING DOWN
A lot of investors (including me) love stocks that pay dividends. With interest rates having been at historical lows for many years now, a stock that pays a dividend looks better than ever. You can easily find stocks that pay anywhere from a 2% to 10% dividend and when compared to what you will get for that bank CD or a Treasury bond, those rate looks very enticing. (Please note that very generally speaking, the higher the dividend for a stock, the more risky it is that the dividend will be discontinued or lowered.)
Buying Dividend Stocks For The Income They Generate
The older you get, the more important dividends may become. For instance, retired people desire the added income dividends generate because Social Security is not enough to allow you to live comfortably. Younger investors might place less of a premium on dividends because they have many years of their working lives ahead of them and can afford to take more chances on growth stocks. Growth stocks rarely pay dividends because the companies prefer to put profits back into expanding their companies rather than pay it out to investors.
So, there is a large chunk of investors that need dividends to supplement their incomes and in the last 20 years more and more companies have decided to pay them out, which is seen as being “investor friendly”.
Dividends Are Great But Not If The Stock Price Goes Down
It would be great to find a nice stock that pays 5% and is guaranteed to never go down in price. So great in fact, that it is impossible to find such a stock. Any stock you buy, no matter how solid the company seems, may experience either a short or long term decrease in share price. And if you are getting paid 5% per year in a dividend but losing 5% or more in the stocks price during that time, you have accomplished nothing.
It is important to understand that even if a stock has a nice dividend of maybe 5% or higher, it is not a guarantee you will make money. Take Ford (F) stock for example: it pays a very substantial dividend right now of almost 5.5% and many investors are looking at potentially buying it just for the dividend (and then hoping it goes up too). But take a look at this terrible chart that shows that if you bought the stock almost anytime during the last 3 years, you will be down significantly in the stock price. That drop in price most certainly is more than the dividend you will have gotten during that same time.
If you but Ford stock right now is there any way of knowing whether the stock will continue on its path downward? NO! You get a great dividend right now with Ford but the risk is immediately visible in that chart.
So when you hear about dividends and how great they are, don’t misunderstand that there is still risk in those stocks. Dividends can help offset that risk but with the high volatility that the markets routinely have now days, you can and will lose money in any market downturn. And you will lose money if the stock price of your stock goes down more than the percent the dividend pays, just like Ford stock holders have experienced. Dividends are great for income but they are no sure thing for making money. There are no sure things in the stock market!
