3 HUGE Dividend Investing Mistakes to Avoid

For our FREE dividend investing guide, go to www.fool.com/PayMe
Our REIT center: www.fool.com/millionacres/rea...
0:12 - Dividend yield calculation
2:11 - Dividend payout ratio
2:55 - REIT and MLP stocks
3:50 - Dividend investing basics
Generally dividend investors are looking to generate income by owning stocks that pay them cash, so it would stand to reason that they should generally focus on the companies that pay them the highest amount in dividends relative to the dollars they invest.
There’s a metric that tracks exactly what an investor will get per dollar of stock bought in a company -- it’s called yield, and it can be helpful but also misleading.
You see yield is calculated by taking a year’s worth of dividend payments and dividing it by the price you have to pay for one share in the company. Seems pretty straightforward, BUT...
Like any metric created by division, yield can go up for two reasons:
The dividend payments increase -- awesome.
The stock price decreases -- not so awesome.
Stocks that have been cut in half are often “on sale” for a reason -- there are major business issues they need to address.
Often a company’s dividend policy will slightly lag its business results, so even if the company posts bad financials that spell doom and gloom in the future, its dividend will remain intact for another couple of months.
And remember, yield looks at what the company has paid over the past 12 months in dividends, not what it will pay in the future.
For all these reasons, you need to look at the company’s yield, but also the overall strength of the business that’s paying the dividend. That’s a far better indicator of whether or not those dividend payments will stick around.
One more handy metric to look at is payout ratio -- it takes the total amount the company pays in dividends and divides it by net income. If the metric is over 100%, it means the company is paying out more than it is bringing in, which isn’t sustainable over the long-term and a sign the company’s dividend could be cut soon.
The “right” payout ratio varies by company and industry. What you want to avoid is buying companies that have had their payout ratios spike to unusually high levels.
By the way, if you want more info on how to analyze dividend stocks, head over to Fool.com/PayMe where we have our FREE dividend investing guide, complete with 3 stocks to get you started.
Okay, back to the show with our second dividend investing mistake -- getting too fancy too fast.
Don’t get too fancy too fast
There are certain kinds of stocks that tend to have above-average dividend payments, giving them great-looking yields compared to other companies.
I’m talking about REITs (or Real estate investment trusts) and MLPs (Master limited partnerships), and the reason these kind of businesses generally pay high yields is that they are given favorable tax treatment because they pass most of their earnings along to their shareholders.
Owning these kinds of companies can be a great way to collect dividend income… if you know what you’re doing.
The problem is that they are different than your standard company and need to be evaluated with industry-specific metrics to see how they truly stack up.
And when it comes to tax time, dividend payments from these businesses are generally treated differently than those from your average company.
For these reasons, it’s important to do your homework on special-structure businesses before jumping in and buying shares.
If you want some help doing that, head over to our REIT center, we’ve got a link down in the video description.
Don’t focus only on the dividend
If you’re buying dividend stocks, what you’re really doing is investing.
The best way to put your money to work for you is to put it into quality businesses with long-term competitive advantages. There are dividend payers that might not have the highest payments, but have proven to be wonderful investments for people who want to see their money grow and be paid dividends in the process.
Okay, so to recap, dividend investors should:
- Avoid chasing yield
- Start out with simple businesses, not ones with more complicated structures
- And focus on the whole business, not just the payment
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[@MerlinD1968]

Been dividend investing for years. Here are 14 stocks I currently own: AAPL, ADM, CF, DE, KMB, KO, MMM, MO, NEM, O, PBA, PM, VZ, XOM. Thanks for a great video!

[@DividendGrowthInvesting]

I had to learn the hard way with thee mistakes.... Really helpful!

[@Schatzrotts]

Great info, thank you. Can you give me your thoughts on ticker iep, is this a good long term buy and hold?

[@PaulVazquezJD]

Great info, thank you .

[@InvestingBookSummaries]

Wonderful video

[@karlbe8414]

Wouldn't YOC (Share apprecition + Divs )/ price paid , allow you to measure the total yield of said div stock. No mention of DRIP or compounding??

[@Benjies]

"An investment in knowledge pays the best interest." - Benjamin Franklin

[@galvanizedfinancialtv9148]

Thoughts on PEI?

[@michaeladams9806]

Hi and thank you for the KZbin video. Here are just three of my dividend stock: (i) Unilever. (ii) National grid (iii) Cine group.

[@ApoetsPoet]

LADR, NRZ, BPY, ARI... All REITs that I currently hold and have been successful in

[@platnumgyzz]

What do you guys think about NRZ. This Reit has had a buy rating of over 90% for months and it been performing well lately.

[@dashdash_peacecampaign]

Dividend stocks are great for Roth accounts😎 I definitely go with STWD

[@andrewpaterson4672]

I'm watching AT&T and am looking to buy a REIT

[@justonidelacruz4059]

So dividends only pay you 1$ every year or? I’m pretty new

[@teamhonzilla]

Im watching Kroger they seem to be good I might start out buying 3 share to see how they do and Fortis is another one

[@BinaryPrime]

I own: Microsoft, Sony, the Southern Company, Citi Group, Switch Inc Class A, Ebay, Vanguard total Stock Market ETF, Vanguard Emerging Markets ETF.

[@josephsayers4480]

The website link you gave

[@J19118]

Apple Hospitality REIT (APLE), that is the reit i own but am curious what your thoughts are on it. It pays a monthly dividend.

[@edkelly7878]

I can’t get to Pay/Me the dividend investing playbook. Why make it so hard?

[@OwenJMathews]

SPHD, O, STAG, and EPR are all reliable monthly paying dividend stocks. Im also buying Disney and Starbucks because i think those two companies are going to take over the world.