Why Dividend Stocks Are Not Entirely Safe Investments
Can you lose money on dividend stocks? The answer to this question is: yes, you can suffer financial losses investing in dividend stocks.
Here’s how…
5 Ways You Can Lose Money On Dividend Stocks
You can lose money investing in dividend stocks as a result of one or more of these situations:
- When broad-based stock markets suffer declines
- If the dividend stocks you own perform poorly
- By investing in high yield high-risk dividend stocks
- When your dividends are eroded by inflation
- By not allowing your dividend investing strategy time to succeed
Next, let’s explore each of these conditions. Then you will be better prepared to make money off dividend-paying companies.
Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.
First, a quick tip. For when you are done, and before you go. Be sure to check out all of our…
Great Articles for Learning about Dividends
Otherwise, back to today’s post. Where we discuss the ways you can lose money investing in stocks.
Most importantly, should you invest in dividend stocks?
I say only if you are comfortable with the risks associated with the following 5 points…
1. When Broad-Based Stock Markets Suffer Declines
I’ve been investing in dividend stocks for a long time. And have experienced several horrific bear markets.
For example…
First, it was the year 2000, when the technology stock bubble burst. Creating big stock market losses.
Second, I was invested in dividend stocks when the real estate bubble burst in 2007. Taking stock markets down too.
That event brought on the financial crisis. Along with the deepest recession, most people living today have experienced in their lifetime.
Finally, in 2020 the pandemic and global health crisis sent stocks into a deep tumble. Fortunately, it was only for a short period.
Thus, each time we have had serious stock market declines. I have lost money on my dividend stocks.
So, it’s safe to say if you stay invested in dividend stocks for the long term. You will experience one or more significant stock market declines too. Resulting in losses from your dividend stocks.
Now, you might be thinking. Is investing for dividends worth it?
And my answer is…yes. I still believe it is. But, that’s not the point of this article.
So, let’s move onto point number 2…
2. If The Dividend Stocks You Own Perform Poorly
I don’t care if you become the best dividend stock picker on the planet. Or for how long or how fast stock markets are rising.
Because sooner or later, you will end up selecting and investing in one or more dividend stocks that lose value.
Most likely, it will result from financial performance issues at the company. That takes the stock price down.
It may be because of internal issues at the companies you own. Or, due to external factors.
For example, dividend stocks are not entirely safe when…
Internal Factors Negatively Impacting Dividend Stock Performance
Sometimes companies struggle internally due to…
- Poor decision making
- Sloppy execution
- Bad business investments
- Inability to attract and retain good employees
- Ineffective quality control
External Factors Negatively Impacting Dividend Stock Performance
While other companies have financial performance issues due to outside factors. For example…
- Lawsuits
- Government regulations
- Aggressive competition
- Changing consumer preferences
- Technological obsolescence
Regardless of what causes the company-specific problems. You can lose money with dividend stocks when the companies behind your stocks perform poorly.
Making it very important. To diversify your portfolio with the optimal number of dividend stocks.
Time for number 3 out of the 5 ways to lose money on stocks that pay dividends…
3. By Investing In High Yield High-Risk Dividend Stocks
As a dividend investor, it is always tempting to chase high dividend-yield stocks. Because those 5%, 6%, 7%, and higher dividend yields look so attractive.
Since they can make your dividend income add up fast. And leave you feeling good about making quick progress with your dividend portfolio.
The problem with higher dividend yields is they come with higher investment risks. After all, investors are saying that they will only buy the stock if it comes with a high yield.
Furthermore, high yields are high for a reason. For example…
- Slow or non-existent profit growth
- Stagnant dividend growth
- Unsustainable dividend payout ratio
- Risk of dividend elimination, reduction, or suspension
Allow me to emphasize the last point in the list above…
Because you will most definitely lose money by investing in high dividend yield stocks. If management at those companies decides to eliminate, reduce, or suspend their dividend.
Finding Good Dividend Stocks With Sustainable Dividends
On the other hand, if you are interested in safe dividend stocks. Paying safe dividends with good dividend yields.
I suggest the Simply Investing Report & Analysis Platform.
Simply Investing covers hundreds of dividend-paying stocks. And has all the best and up-to-date dividend metrics right at your fingertips. Including strict criteria for stock valuation.
Also, Simply Investing provides dividend stock recommendations. To help you buy the best dividend stocks. And buy them at the right time at a profitable entry stock price point.
You can learn more about Simply Investing here.
To recap this point, you can lose money with dividend stocks by chasing high dividend yields. Not always, but the odds will be stacked against you.
Personally speaking, some of my worst investments have been stocks with high dividend yields.
Next, onto our next point…
4. When Your Dividends Are Eroded By Inflation
Fortunately, we haven’t had much inflation in recent years. However, inflation has started to pick up dramatically.
And inflation gives your dividend stocks plenty of trouble.
First, inflation erodes the purchasing power of the dividends you receive.
For example, invest in a stock with a 3% dividend. While inflation is running at 5% annually.
Then your dividends will have less purchasing power in future years. This is especially impactful when using your dividends to fund retirement expenses.
On a side note, dividend growth stocks that increase their dividend per share annually. Can help offset this problem.
Second, inflation is typically accompanied by higher interest rates. And those higher rates will usually put downward pressure on the value of your dividend stocks.
As a result, you can lose money on dividend stocks during times of significant inflation.
Next up, one final way to lose money investing in stocks…
5. By Not Allowing Your Dividend Investing Strategy Time To Succeed
One of the worst things you can do is pick a dividend investment strategy. Or, any investment strategy for that matter. And not stick with it.
Since any investment strategy, dividend investing is included. Will not perform well all of the time.
Because dividend stocks can fall out of favor. And fall out of favor for long periods. Thus, testing your patience.
So, whatever investment strategy you select, dividends or otherwise. Stick with it for the long term.
Most importantly, don’t continually jump to the current hot investment. Or the latest and greatest investment strategy.
To further emphasize this point, remember that dividend investing requires knowledge and patience. It simply is not a get-rich-fast scheme.
It takes time and discipline. To invest in the right dividend stocks. Buy them at the right time. Then hold for the long term.
While making smart additions and adjustments to your dividend stock portfolio as you move forward. Waiting for your dividend stocks to pay back and then some.
Okay. That completes our review of 5 ways you can lose money on dividend stocks. Next, allow me to wrap up with a summary and some parting thoughts…
Can You Lose Money On Dividend Stocks?
Dividend stocks and dividend investing are excellent sources of current income and long-term total investment returns.
However, you can lose money investing in dividend stocks. And we discussed 5 ways that it can and will happen…
- When broad-based stock markets suffer declines
- If the dividend stocks you own perform poorly
- By investing in high yield high-risk dividend stocks
- When your dividends are eroded by inflation
- By not allowing your dividend investing strategy time to succeed
At a minimum, these items will make your total return on investment less than its full potential. In the worst case, you will flat out lose money.
So, it’s simple. If you can’t handle dealing with issues like this. Don’t invest in dividend stocks.
As a result, you might be wondering, are dividend stocks safe? And my answer is, that they can be. But, not always.
More Reading So YOU Don’t Lose Money On Dividend Stocks
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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.