Story by Cliff D’Arcy
The 6 big problems with dividend shares
As an older investor seeking passive income, I like dividend shares. Actually, most of my family’s unearned income nowadays comes from these cash payments that companies make to their shareholders.
The downsides of dividend investing
In an ideal world, I could make money simply by buying stocks that offer market-beating dividends. Alas, this world is far from ideal, so this is no ‘get rich quick’ scheme.
For example, here are six problems that I have to deal with as a dividend disciple:
- Only some shares pay out cash
Almost all shares in the blue-chip FTSE 100 index pay out dividends. However, this proportion reduces rapidly as I move into the mid-cap FTSE 250 and smaller companies. That’s why the Footsie is my #1 hunting ground for cash streams. - Payouts are not guaranteed
Unfortunately, future unpaid dividends are almost never guaranteed. Therefore, they can be cut or cancelled with hardly any notice. This happened a lot during the Covid-19 crisis and continues today among companies that need to preserve cash. - Yields are usually historic
When I look up the dividend yield of a particular share, it’s important for me to establish whether it is a trailing (historic) or forecast (future) yield. Also, if a firm has recently cut its payout, then this may not be entirely apparent, so I always dig deeper into its public announcements.
- The dividend curse
Sometimes, listed businesses that pay out large proportions of their profits in dividends neglect to invest sufficiently in future growth. When this happens, I occasionally notice it by spotting long-term declines in share prices over, say, three and five years.
I call this effect — hefty dividends undercut by falling share prices — the ‘dividend curse’.
- Debt and divvies
Paying out large sums in cash to shareholders over time can leave a company’s balance sheet looking shaky or stretched. Also, some firms prefer to increase their net debt rather than prune payouts to their owners - The ex-dividend drop
The ex-dividend date is the day that new shareholders no longer collect the next dividend. Thus, buying stock before this day secures me the dividend, while buying on or after the ex-dividend date means I don’t collect it.
Hence, share prices usually drop on ex-dividend dates to reflect the loss of this cash reward.
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Or reasons, why I only have Investment Trusts in the portfolio.
Your article helped me a lot, is there any more related content? Thanks!
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