High Dividend Stocks – Why You Can Still Lose Money Very Easily

By James Woolley

Many people automatically assume that investing in dividend stocks is a guaranteed way of making money, particularly if you invest in those with high payouts of between 5% and 10%, for example. However this is not really true at all.

If you are investing for say 10 or 20 years, then you could argue that the timing of your buys is not necessarily that important. That’s because by earning say 5% every year from your dividend stocks, these payments will more than compensate for any flat or slightly negative share price movement. This is particularly true if you reinvest the proceeds each year.

However if you don’t intend to hold on to these stocks for as long as this, then you need to place more importance on when you actually buy because it can make a huge difference. Assuming that a company is likely to continue paying decent dividends each year, you should ideally invest in these companies when the share price is temporarily oversold. So for example when indicators such as the RSI and Stochastics are both in oversold territory.

The result of this is that you may well have greater capital gains when you do eventually sell, and you will also earn more in percentage terms from your dividend payouts. To demonstrate this point, if the dividend for a stock is fixed at 10p each year, you would earn 10% per year if you had bought at 100p, 6.66% if you had bought at 150p, and just 5% if you had bought at 200p.

If you have a habit of buying stocks when they are showing strength, which can often turn out to be the top of a trend, then you could easily lose money from these stocks in the long run. There is little point investing for the sake of receiving good dividends if you keep buying at overinflated prices because the share price could subsequently fall quite substantially, negating the effect of the income that you receive each year.

Another way you can lose money is if you look for income-generating stocks from amongst the small and mid-cap companies. While some of these companies offer some very attractive yields, they are a lot riskier because their futures are a lot less secure than many of the large-cap stocks. If they run into difficulties, they could easily reduce the dividend or scrap it altogether.

So the point I am making is that you are not guaranteed to make money from high dividend stocks, even if you are investing for the long-term. Yes some of the big companies should offer some decent returns, but even then there is a still an element of risk. So this is something that you might like to bear in mind in the future.

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