I used to be a risk adverse, conservative investor. To be honest, I wouldn’t even call myself an investor. I only put money in random dividend stocks. The only thing I looked at was yield and familiarity with the company.
Oh, the Keg is a great restaurant chain in Canada, and their yield is 6%, let’s invest in that. Jack Astors gives 9% in dividends, totally worth investing in.
No doubt, it felt good to receive some money every month. It felt like a solid investment putting money into dividend stocks. I got money back every month or quarter, so I felt safe.
I was lucky I bought those companies during the 2008 recession, so not only did I get dividends, these companies actually appreciated. Some even got acquired.
In hindsight, it was a wrong decision to invest in these companies. I neglected
- where these companies were getting money to pay its dividends
- debt, revenue, and profitability
- growth
I was just lucky. End of story.
My friend, FI Fighter and I had a chat years ago at a local cafe in Cupertino, and he mentioned that dividend stocks were comfort stocks. Essentially, you pay yourself with your own money, and the dividends comfort you. Your net gain is zero. The risks are no less than mining stocks and yet the upside is far less than mining stock.
Initially I didn’t pay too much attention to his thoughts, but the more I thought about it, the more I agreed. In a couple months, I started liquidating all my dividend stocks and entered the mining space. I was glad I did or I would have learned about dividend cuts and its impact on share prices the hard way.
Long story short, dividend cuts started happening a year or so later, and share prices went crashing. These, my readers, are the hidden risks in dividend investing. When you hear people say ‘nom nom nom, thanks for the yummy dividends’ on company forums, stay the F away from those companies.
The focus shouldn’t be on the dividends itself; dividends should be the outcome of a well operated company.
I hope I’m better than that now.
