Don’t Make The Same Errors I Did As A Beginning Dividend Investor
Why make dividend investing mistakes if you don’t have to?
Because today, for your benefit. I want to review some of the worst things I did as a young dividend investor.
So, let’s jump right in…
My Worst 10 Dividend Investing Mistakes To Avoid
Certainly, I would have earned better investment returns. And have more money today. Only if I hadn’t made the biggest dividend-investing mistakes in history.
Specifically, these are the 10 dumb things I did. Back in my early days as a dividend investor:
- Believing I knew what I was doing
- Not having a dividend investment strategy
- Avoiding a thorough stock research process
- Investing in hot stocks that made the news
- Focusing too much on dividend yield
- Ignoring dividend growth
- Not having clearly defined sell criteria
- Misunderstanding all tax implications
- Not being intentional about dividend reinvestment
- Thinking I was going to get rich quick
So, when learning about dividend investing for beginners. Don’t make the same mistakes I did.
Better yet, to help you on your journey, allow me to more fully explain. By going through each of my dividend investing blunders one by one…
Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.
1. Believing I Knew What I Was Doing
Yes, I was a 20-something-year-old know-it-all. However, certainly, I’m not the only person that has suffered from this same issue.
Fast forward almost 40 years and looking back I had no idea what I was doing. On a positive note, I did get started with dividend stock investing. But, I was not smart about it.
So, don’t kid yourself and be surprised by a brutal bear market whenever it comes. Because it will.
Today, there are so many more resources available to accelerate your learning. One I like is…
The Financial Freedom Investing Course
…offered by Simply Investing.
From it, you will learn the best practices for building your passive income stream from dividends. It’s one investment you won’t regret making!
Or, just stick with me here and now. To learn from the things I got wrong as a beginning dividend investor.
2. Not Having A Dividend Investment Strategy
Back in the day, I thought buying any old stock with a dividend was a dividend investing strategy.
What I didn’t understand is this…
Dividend investing is not a “one size fits all” investment approach.
Today, I believe there are several ways to go about dividend investing. They are:
- High dividend income – low growth
- High growth – low dividend income
- Balanced growth and dividend income
Just like my current approach to dividend-paying investments has evolved over the years to what it is today. Your approach should depend on your age, risk tolerance, and financial goals.
So, first of all, choose a dividend investing strategy. Next, stick with it over time. Finally, adapt your strategy as circumstances change.
This next failure of mine is one of the basics you would learn from taking a course in dividend investing 101…
3. Avoiding A Thorough Stock Research Process
In my 20s, I neither understood nor bothered with doing smart dividend stock research.
I just identified a company name I recognized that offered a stock paying dividends. Those two things were good enough for me.
Unfortunately, I didn’t look into a stock’s dividend history. Such as knowing if they were a Dividend King or Dividend Aristocrat.
How about the dividend payout ratio? It is a good indicator of dividend safety.
Nope! Didn’t even know what it was.
What about stock valuation? Well, if I wanted to buy. I believed the stock must be a good value just because I wanted it. And because it was in the news.
But now, based on my current perspective. It’s very important to understand what you are buying.
Furthermore, as a new dividend investor, if you don’t want to do the work…
Then I suggest the Motley Fool Stock Advisor. For fully researched stock picks delivered to your inbox every month.
4. Investing In Hot Stocks That Made The News
As I just said, a recognizable company stock that paid a dividend. That was my research.
And those recognizable companies were often the ones that made the news. Because of how well they were doing.
Thus, I often bought hot stocks that pay dividends. On the surface, this approach may seem okay.
But what happened is that I often bought the stock of the moment. Only to see its price fall back to earth shortly after I made my purchase.
Unfortunately, doing so was a bad recipe for making money with dividends.
Next up, here’s another one of the rules I should have learned in dividend stocks 101.
Oh yeah. That’s right. They don’t offer that course in school! But they do offer it here.
5. Focusing Too Much On Dividend Yield
Since I identified the hot stocks that paid dividends. It often led me to get hyper-sensitive to the dividend yield.
And what this meant for me was preferring stocks with high yields. And dismissing those with low dividend yields.
Conversely, experience has indicated to me that some of the best dividend investments have low dividend yields. Often, less than 2%.
Furthermore, here’s a good thing about a low dividend yield…
6. Ignoring Dividend Growth
Because lower dividend yield stocks, often have the best prospects for rapid future dividend growth.
Unfortunately, the potential for dividend growth was not something I concerned myself with at the time. That was a big mistake.
Okay, take a deep breath. And let me recap briefly as we explore this next point…
7. Not Having Clearly Defined Sell Criteria
Now you know that I didn’t have a clear dividend investing strategy. Nor did I do investment research or due diligence on my potential investments.
As a result, I didn’t have any clear reasons to buy a specific stock. Other than the fact it paid a dividend.
This also means I never knew when to sell. Because without having clearly understood reasons to buy. Neither you nor I have criteria to evaluate the right time to sell out.
Often what I would do is sell my winners when I had them. To capture the gains so I wouldn’t lose them.
Many times those winners I sold would go on to greater success. While I held my losers hoping to break even. Then jumping on to the next hot dividend stock that came across the news wires.
8. Misunderstanding All Tax Implications
Then there is the topic of taxes. Yes, I understood the basics about taxes on dividend income and avoiding long-term capital gains.
However, I also made investments in master limited partnerships (MLPs). And foreign companies too.
Both are types of investments I have either eliminated from my portfolio entirely. (MLPs, for example). Or, in the case of foreign shares, significantly reduced my exposure in recent years.
Why?
The tax forms and tax implications for MLPs remain mind-boggling for me to this day. And the tax credit on foreign dividends is way more complex than it ought to be.
So, if I don’t understand it. I don’t invest in it. It is another basic rule that should be taught in a dividend stock investing 101 class.
On the other hand, there are many high-quality, simple, and straightforward U.S.-based dividend stocks for my investment dollars.
These are the types of stocks I buy and hold today. They have reasonable dividend yields, high dividend safety, and growth potential.
Thus, there is no need to get caught up in a bunch of complicated tax rules.
9. Not Being Intentional About Dividend Reinvestment
On a positive note, I did reinvest dividends. However, I wasn’t very intentional about my reinvestment decisions.
Rather, I was automatically reinvesting all dividends received. Right back into the shares that paid them.
When I could have let those dividends accumulate in cash. And made wise investment choices when enough cash was available. This is what I do today.
Of course, given the worst dividend investing mistakes I was making in my early days as a beginning dividend investor.
You should know by now that wise investment choices weren’t my strong suit!
10. Thinking I Was Going To Get Rich Quick
Finally, being a know-it-all dividend investor, I was sure I was going to get rich off dividends and retire early.
However, time told a different story.
That said, in the long run, I didn’t do too bad.
However, one lesson I learned, is that dividend investing is not a get-rich-quick scheme.
On the other hand, I believe investing in dividend-payers is a solid approach to building long-term wealth and passive income.
Okay. I feel like I have taken a pretty good beating in this article today. And have aired out my dirty laundry.
So, please allow me to offer a few parting thoughts before we are done…
Dividend Investing Mistakes To Avoid: Wrap Up
After reading this, you may be asking yourself…
Did this big dummy do anything right? Or, is investing in dividend stocks for beginners as difficult as he made it out to be?
To that, I would say those are fair questions. And here is my response…
What I did right is stick with dividend investing over the long term. And most importantly learn from my dividend investing mistakes as I moved forward.
Thus, I learned to be a better dividend investor than I was before. And attempted to be even better every year moving forward.
As a result, making higher-quality investment decisions as time passed. And allowing for my dividends and dividend stocks to compound over time.
Because dividend investing is a long and enjoyable journey. Not a sprint or a race.
Okay. That’s all for today. Before you go, be sure to check out…
More Reading For Dividend Investors Not Wanting To Make The Same Mistakes I Did!
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Author Bio: Tom Scott founded the consulting and coaching firm Dividends Diversify, LLC. He leverages his expertise and decades of experience in goal setting, relocation assistance, and investing for long-term wealth to help clients reach their full potential.