The Biggest Mistake Dividend Investors Make
I’m a big proponent of dividend investing — buying stocks that pay dividends, providing a regular income stream from your investments. Not only is this strategy popular with retirees who are looking for more income than most fixed income instruments provide, but also with younger investors who want to build passive income and take advantage of the compounding ability (i.e. reinvesting and purchasing additional shares of the company).
I see a lot of dividend investors only considering the size of the dividend when selecting a stock to invest in. They think, ‘A bigger dividend must be better.’ Well, instead, investors should instead assess the total return of the stock — which includes the dividend yield + the stock price appreciation (or depreciation). What good is a 6% dividend if the stock price dropped 20%? You’re at a -14% return for the year. But if the dividend yield is 3% and the stock price appreciated 10%, you’re at a +14% total return.
Lawrence C. Strauss, a reporter at Barron’s, put pen to paper and highlighted the importance of considering the total return on a dividend stock. Strauss used the example of the company Prologis (ticker: PLD).
Prologis is an industrial REIT, which means they own the real estate that industrial companies operate out of. Prologis’ dividend is 2%, which is not very exciting. A lot of investors would filter them out because of the low yield. However, annually, Prologis has delivered an average total return of 26% over the past 3 years.
Total return is just one of the things that you need to consider when investing in a dividend paying stock. In episode 23 of the Agent of Wealth Podcast – Can Dividends Lead to Financial Freedom?, I discussed other aspects of being a successful dividend investor.
The Market is at a High, Should I Wait to Invest?
It’s common for people to feel discouraged to invest when the market is at a high. While I agree with the philosophy of buying low and selling high, the dip people are waiting for may never come. Or, when it does, the price to buy in may be higher than where the market is right now.
The market has a long-term upward bias, meaning that over the long run, the trend has been upward. There will always be reasons not to invest. A few of them right now include: A global pandemic, inflation and rising interest rates, inflated asset prices and geopolitical events.