Don't Make This Dividend Investing Mistake
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I have found that all new investors in the stock market focus on the wrong thing when it comes to dividend investing. They all focus on the dividend yield and they think that if a dividend yield is super high then it is a way better stock than a smaller yield. This cannot be further from the truth and is a serious investor trap.
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Well, good day subscribers Hope you guys are having a great day as always out there today I want to go ahead and hopefully save you guys a lot of money. All right, I want to explain how to avoid this huge dividend mistake that so many people make when they start getting involved in the stock market and they start kind of get paying attention to dividends and like not want to buy this dividend stock and this one’s better than this one right.
And I want to explain what this mistake is. I want to explain how you can avoid this and what you should really be looking at when it comes to dividend stocks guys, so hope you get a lot of value out of today’s video. I hope it saves you a lot of money down the road. Now first off, I read some comments sometimes that people just don’t understand like the psychology of why somebody would only invest in dividend stocks.
Me personally I hold some dividend stocks, but I am not solely a dividend investor. But I want to explain the psychology behind the dividend investor because you might be a dividend investor at heart and that might be the best way for you to personally invest not everybody’s the same.
Not everybody wants to value invest, not everybody wants to growth invest not everybody wants to dividend invest. Everybody’s different out there you watching this right now you might be an actual dividend investor in that should maybe be the way you go personally, it depends on your situation. I want to explain here right now and get this out. Like why somebody would be a dividend investor, okay.
The first thing is they want to make money while they wait for share price gains, okay, you buy into a stock there, they’re basically two ways you can make money from a stock, right? One is you get paid out dividends, if it’s not getting paid out dividend money, then it’s basically waiting for those shares to hopefully appreciate over time, and the next person being willing to pay more money than what you paid for those shares, right.
And those are really the only two ways you can really make money for the stock market. I mean, there are options and complicated things like that, right. But for the most part, every almost everybody participate in the market, they’re making money two ways, either from dividends or from basically where they bought their shares out, they bought the shares at $10.
Somebody buys them a few years from now for $15. Okay, that’s the bottom line with that. But with dividends, hey, you can you basically you’re waiting for your share price gains, you’re making that dividend money in the short term, okay, which is nice. And you can plow that into buying more shares if they’re under priced. Or you can go ahead and use that money on yourself or whatever you want to do.
Okay, number two, it is somewhat like buying a house and renting that house out. Rather than just buying a house and holding it let’s say you’re a real estate investor, right? You can buy a house right you’d like this house is going to appreciate over time is way undervalued right now, that’s a deal and a half.
I’m gonna go ahead and buy this house, you could buy that house and you could just hold that house right and over time, hopefully appreciates and you get to sell it for a big profit. But on the flip side, you could also hold that house and rent it out and make some income in the meantime, right might not be all the money in the world, but it will be some form of income in the meantime, while you wait for that house to go ahead and appreciate.
Same thing with dividend investing, you’re holding this these you know the stock basically, you’re hoping it goes up over time you believe you’re gonna be right and you’re bullish thesis the stocks gonna appreciate over time, but you’re getting in this dividend money in the short term, which is nice. Certainly, right?
So that’s kind of the mentality there. Number three, let’s say the market return is 0% a year, let’s say let’s say 2019 to 0%. In year markets don’t go up markets don’t go down. It is what it is. Okay. If you held dividend stocks, you are still up on the market. If all your stocks didn’t move at all this year, they all went 0%. Right?
As long as you still held that dividend money, you’re technically doing good, okay, if you held all your stocks, and they paid an average of 3% dividend yield, you just made 3% of your money this year while the market was at 0%. So that is something to take into account there.
Okay, number four dividend stocks tend to attract longer term shareholders. And the reason being is sometimes with these growth stocks, sometimes you’re going to get very short term in nature type people, people that are really trying to play things that are short term trying to think about, oh, they’re gonna have a next big quarter, or they’re gonna have a big year this year, and.
I need to be in the stock this year because this year is going to be huge for the stock and things like that. And you get a lot of people playing very short term events and some of these growth stocks more than the dividend related stocks and these ones that are big dividend payers, you’re not really going to get that many people playing short term moves because it’s just not worth it to them.
Why would a short term trader try to jump in PepsiCo shares like most the time there are way better opportunities like from a risk reward standpoint to go ahead if you’re trying to do short term activities where you try to play company for the next quarter the next month or next burning period next week or something like that, right?
So these dividend stocks they tend to attract longer term shareholders and some folks absolutely love that Okay, so that’s the psychology around a dividend investor. Okay, I want to explain that now let’s get into this huge mistake that dividend investors especially new ones in the market are making already guys let’s go ahead and get into this dividend investing mistake.
Now first off, I just want to say if you are making this mistake, or you have made this mistake in the past past, like don’t feel dumb, okay, because believe me, I made the same mistake and almost everybody when they first get involved in the stock market and come across dividend stocks, they make this mistake.
State Okay, so don’t feel like you’re like you’re not smart because you, you haven’t figured this out or something like that, right? Everybody almost makes this mistake when they get involved with the stock market. Okay, so you have two stocks here, you have ABC stock, and you have XYZ stock. Any newer person to the stock market is going to look at this and they’re going to say, okay.
ABC stock pays a 3% dividend yield, this one XYZ stock over here pays a 5%, dividend yield, hey, if I’m gonna invest in one of these stocks, XYZ stock is a way better stock for me to invest in why because well, if you got, let’s say, let’s just use a round number, let’s say you got $100,000 in the stock right?
At a 5% yield, you’d get $5,000 a year paid out to you in dividends, versus this one, if you had that same $100,000 in the stock, you would get about $3,000 in dividends. So somebody’s gonna look at this as a newer investor in the stock, we’re gonna say, this stocks way better, it pays me out way more money, I’m gonna make an extra $2,000 being in this stock than in this stock.
So XYZ stock is a sock for me to go ahead and invest in, okay. And that’s just how it is like, most people get involved in the stock market at first, like that’s the way they view it. I’m just here to tell you, that’s going to cost you so much money. Okay? This mistake right here is going to cost you so much money if you’re thinking like this. Okay. Let me explain the things that are more important. Okay.
So what if I told you that stock ABC has a payout ratio? Okay, a payout ratio of, let’s say, 25%? And what if I said XYZ stock has a payout ratio of let’s go ahead and say 95%. Okay, now, this should change your judgment quite a bit. A payout ratio basically means how much of their earnings per share? are they paying out in dividends per share?
Okay, so let’s say this, the stock has, you know, let’s use a rough number like $6 per share a VPS, let’s say ABC stock has $6 per share of epcs. If they have a 25% payout ratio, then that essentially means they’re paying out $1.50 and dividends per year, which is a pretty low payout ratio, okay?
That’s a pretty low payout ratio, this stock on the other hand, they’re paying out 95% of their NPS in the form of dividends, they almost have no room to up that dividend in the future, which is a very bad thing, right? Because if you’re buying into a dividend stock, you’re playing a holding this thing long term, then you want to stock that hopefully, he’s going to pay out a lot more money in the future, right?
And if they’re already at a 95% payout ratio, like like, what realistically can they really up that dividend the future they can, they’re pretty much maxed out. So though this one has a bigger dividend yield as of right now and might pay out more dividend money as of right now, what’s going to be the scenario in two years from now three years from now, five years from now, this stock may be a way bigger dividend payer at that particular time, okay?
What if I told you this company has net income, okay, this company has net income, which is their bottom line, which is rising, and this company has net income, which is decreasing, Okay, this one is going down, which stock is really the better dividend stock out there, the one that pays the 5% yield with a 3% yield, obviously, it’s the one that pays the 3% yield, in the scenario rate.
Their payout ratio is way lower, they’re gonna be able to update dividend a ton over future years, and their net income is actually rising, that’s a good positive sign, right, whereas this company’s net income is shrinking, they have their net income is shrinking.
While their payout ratio is really high, guess what’s going to end up happening, that dividend is going to get cut over time in that $2 a share they might have paid out to you in the form of dividends before might also be $1.50 might also be $1.25 might be $1.
Never mind that that’s where the share price is probably going to go over time share price over time is probably going to go down as well right because the company is becoming less profitable, they’re paying out all their money in dividends when they should really probably be focused on on putting that.
Money back into the business and this happens all the time in the stock market people see high yielding stocks and they think oh my gosh, that’s such a great dividend stock till they realize that companies paying out all their APS or almost all their VPS in the form of dividends I’ve seen it with stocks before when they pay out more than their ETF in the form of dividends Okay, where.
I’ve literally seen that with a company is paying out more than what they have coming in and profits in the form of dividends Okay, then you see some of these stocks get absolutely nailed the newer investors and the stocks get absolutely destroyed they got that.
5% yield for a few years but meanwhile they lost 20% or 30% on the value of their shares they held over those three or five years and so they actually net lost money in the stock and that’s a that’s a painful thing to see there guys. So it’s a lot deeper than just you just look at the yield Okay, it is so much deeper than that. Okay, by the way, I want to mention something Guys.
If you’ve got to becoming a master the stock market course in the past, I just added the dividend investing mastery section. I added that just a few weeks ago about probably about a month ago. So make sure you go ahead and check that out. If you haven’t link is down there in the description.
If you’ve never gotten past and you want to go ahead and get it we actually have a discount today guys hope you had a lot of value out of this don’t make this dividend investing mistake guys. Thank you for watching and have a great day.