Dividend investing is awesome.
You get paid to own companies, and if you pick the right ones, those payments can grow every year. Over time, thatâs how real wealth gets built.
But⌠a lot of new (and old) investors make the same mistakes.
Iâve made a few of these myself.
Mistakes are great teachers. James Joyce called them portals of discovery.
The good news is that you donât have to make the mistake to learn from it:
So today, letâs learn from 4 common mistakes youâll want to avoid if youâre serious about dividend investing.
1ď¸âŁ Chasing High Yield
Itâs easy to get sucked in by a big juicy yield.
You see 8% or 10% and think, âthatâs the long-term market average, every year in cash!â
Or at least I do.
Iâve written about this mistake before, and I put it as #1, not just because itâs a very common mistake, but also because itâs one that Iâm vulnerable to.
When you get tempted, remember: a very high yield is often a warning sign, not a gift.
It can be a sign that the company is struggling, overpaying dividends, or both.
And if that dividend gets cut, the stock price usually drops too.
Double hit.
Example:
Kraft Heinz had a dividend yield of close to 6% in 2018.
Investors who looked closely would have seen that Kraft Heinz was paying out more cash than it was earning.
A year later, the dividend was cut.
The lesson: Treat high yield as a red flag to dig deeper. Check revenue, earnings, debt, and the payout ratio before buying.
2ď¸âŁ Buying for the Dividend, Not the Business
Some people treat dividend stocks like ATMs.
They only look at the yield and donât care what the company actually does.
Big mistake.
Dividends come from profits. If you donât have a strong busines, you donât have a reliable dividend. Itâs that simple.
Example:
For years, people bought AT&T just for the fat dividend.
The company was loaded with debt, and its core business wasnât exactly thriving.
In 2022, AT&T finally cut its dividend â and the stock price dropped right along with it.
Investors who only looked at the yield were blindsided.
But anyone paying attention to the business saw warning signs years earlier.
The lesson: If itâs not a business youâd want to own in real life, donât buy the stock.
You donât need to become a full-time analyst but you should understand the basics:
How does the company actually make money?
Do they have a real advantage?
Is their industry stable?
3ď¸âŁ Ignoring the Payout Ratio
The payout ratio tells you how much of a companyâs profit is going to dividends.
When this number is too high, itâs a sign the dividend might not be sustainable.
A rough rule of thumb: keep it under 60% for most companies.
Some industries (like REITs) can go higher, but even then, watch the trend.
If the ratio keeps climbing, thatâs a red flag.
Checking this one number can save you a lot of pain.
Example:
For decades Shell was seen as one of the safest dividend payers on the planet.
They hadnât cut their dividend since World War II.
Bu the company paid out more in dividends than it earned for years.
In 2020, when the pandemic dried up oil demand, they finally had to cut the dividend.
The lesson: Watch how much profit the company is paying out. Itâs good to get our share as owners, but not so much that it hurst the long-term health of the business.
4ď¸âŁ Trying to Time the Market
Everyone wants to âbuy at the bottom.â
In reality, almost nobody gets it right, not even the pros.
Waiting for the âperfectâ time often means you sit on the sidelines while good companies keep paying and raising their dividends.
Example:
Think back to March 2020.
When the market crashed, plenty of investors âwaited for the bottom.â
But the rebound came fast. Within weeks, prices were climbing again.
Those who waited ended up buying at higher prices, or worse, missing the move entirely.
And while they sat on the sidelines, dividend investors who bought locked in high staring yields.
The ones who held their ground kept collecting income through the recovery.
Timing the market sounds smart, but it usually means you just wait⌠and miss out. Time in the market is what really matters.
The lesson: Buy consistently over time, at fair prices, and let compounding do the heavy lifting. Time in the market beats timing the market.
Thatâs it for today!
Dividend investing works best when you keep it simple:
Donât get blinded by high yields
Focus on strong businesses
Watch payout ratios
Stop trying to time the market
Do that, and youâll be miles ahead of most investors.
One Dividend At A Time
-TJ
PS Test out Compounding Dividends risk free for 90 days here
Used sources
Interactive Brokers: Portfolio data and executing all transactions
Fiscal.ai: Financial data