The One Mistake You Can’t Afford to Make When Buying Dividend Stocks

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Dividend stocks can be a great investment. But read on to avoid a major trap they tend to lead investors into. 

Your goal as an investor is to make money, and there are a couple of ways you can do that. First, you can load up your brokerage account with quality stocks and hold them for a long time, until their share prices appreciate a lot. You can also make money by investing in stocks that pay dividends.

When a company pays dividends, it’s sharing a piece of its profits. It can be argued that companies that don’t pay dividends might have more growth potential because rather than sharing profits with stockholders, they’re investing all of their profits back into the business. But it can also be argued that plenty of companies strike a good balance between sharing the wealth and investing in their own long-term growth, so owning dividend stocks is by no means a bad thing.

But if you’re going to hold dividend stocks, whether in a brokerage account or IRA, it’s important to avoid one big trap that investors tend to fall into. Doing so could be pivotal to meeting your long-term financial goals.

Don’t be lured by dividends alone

It can be tempting to invest in companies whose dividends are generous. But one thing you don’t want to do is focus solely on dividends without digging into the financial health of the companies in question.

It may be that a company is paying such a high dividend that it’s not investing enough in research and development. That could lead to a lower stock price over time rather than a higher one. Or, it could stunt that company’s growth so its share price does grow in time, but not a whole lot.

In fact, one thing you may want to do in the course of choosing stocks is pick companies with a lot of growth potential and whose finances are solid. If those same companies happen to pay a dividend, great. But really, the dividend income you receive should be a bonus perk of owning shares of a given company — not the core reason you invest in that company.

Remember, companies are not required to pay dividends, and many don’t. And starting to pay a dividend does not obligate a given company to continue to do so.

Of course, some companies have a solid history of not only paying dividends, but increasing them. You can check out this list of Dividend Kings for companies that have increased those payments for 50 consecutive years. But still, before buying shares of any of the companies on this list, do your research to make sure the businesses themselves are solid and align with your investing strategy.

It’s not worth chasing those paydays

Dividend income is a great thing to have. You can use your dividends as cash or reinvest them to further grow your portfolio.

But don’t make the mistakes of buying a given stock for the express purpose of scoring a higher dividend. Not only might those payments cease to exist, but what you might gain in the form of dividend income, you might lose in the form of share price appreciation, or a glaring lack thereof.

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