Dividend stocks are investments that return either cash or additional stocks that companies pay to their shareholders for simply owning a share in the company. This translates to regular income or constant share increase for the shareholders. It definitely sounds mighty swell, right? To get profits by simply owning a share is a great way to earn a living indeed. However, it’s not always the case as the following instances will tell you. Owning dividend stocks is apparently not always beneficial and works best only during certain times. Read on and get to know why dividend stocks are not always a good part of a portfolio.
1. During Interest Hikes
One of the most anticipated market events this year 2016 is the Federal Reserve’s interest rate hike. It’s decidedly going to be a game changer as it’s effects will be felt by everyone in the market. And the impact it has on dividend stocks are negative. While it’s good during times of low interest rate, even beating returns from savings accounts in banks, during rate hikes, dividend stocks’ return rate significantly decline.
2. If Your Interest is Growth
Although dividend stocks provide a great source of income, it doesn’t do much for growth. Depending on your investment needs, you should seek the ones that are suitable for you. Dividend stocks are commonly for veteran investors that have diverse portfolios and established assets. For young investors that need growth more than income, they have to look harder to build their foundation.
3. When the Company is Not Performing Well
Getting payments quarterly can be a very attractive thing but you must always look at the details. Is the company strong enough to offer these dividends instead of investing the money on businesses, expansion, or acquisitions? As an investor you must do your research to know if the company has the power to offer dividends. For example, an upcoming technology firm is probably not the best company to offer dividends. Another issue is the company’s capital. Check out the company’s financial capabilities, it’s balance sheets, and audits and see if it has any loans or how it funds itself. It may cause trouble if, for example, the company is in debt. It may cut down your dividends to compensate for such loans. Lastly, check for the company’s dividend growth. A historical performance will give you an idea of what your future might look like if you invest in the company. Make sure it’s healthy and well for years to come.
4. If It’s Too Pricey
Dividend stocks as defined is a quarterly payment to you by a company because you are a shareholder of that company. This definition is appealing because you get paid but the devil is in the details. You must first know what the specifics. How much will you pay for the share and how much will you get paid quarterly? Know the yield percentage and know the company before committing yourself to anything.
Investing in dividend stocks can be very advantageous if you know how to research and incorporate it to your portfolio. If you can do that then it won’t be a problem.