Investing in stocks is just one of the many ways to grow wealth. However, high dividend stocks have the ability to generate more wealth more quickly if you’re a savvy investor. It’s important to consider the reason the company has a high dividend. There could be some financial trouble that has caused the company’s share price to nosedive, which can have negative implications on how well those dividends will do in the future. As big of a draw as high dividend stocks are, there are some things you need to be aware of before jumping into this type of investing. Here are some of the untold dangers you want to look out for.
As we already said, it is imperative that an investor thoroughly research any high dividend paying company. Mywealthandinvestment recommends not skipping this step because it will undoubtedly impact the future of your portfolio. You absolutely must ask why the dividend is so high. When a company is in financial disrepair, the share prices drop and the dividend increases. The high dividends will not last long with a company in distress because reducing the dividend saves the company money, which makes share prices plummet even further. Be sure to check out these key points when considering a company’s high dividend stocks to help you be confident that you are choosing stock that is consistent and reputable.
- The amount of free cash flow
- The past dividend payout ratio
- Past dividend schedules
- Payment amounts
There is also a high interest rate risk when it comes to high dividend yields. When the Federal Reserve raises interest rates there is an overall outflow of equities. Lower interest rates make dividend stocks much more attractive to investors because there is a higher guarantee of return. Most investors do not want to risk their principle for a couple extra percent of yield. Investors prefer to take advantage of the risk-free rates of return that come with holding government bonds in comparison to yields when interest rates are high. In response to the global pandemic, rates are extremely low, so now may be a good time for you to go high dividend stock shopping.
Safeguarding Your Portfolio
You can break into the world of high dividends by taking advantage of the services of a financial planner or a brokerage firm. Of course, there are fees likely to be associated with this, but having someone to guide and encourage you as you grow your portfolio can be a real confidence boost. You’ll also be able to more safely maximize your investments while minimizing your investment taxes.
Increasing personal and generational wealth is important, and high dividend stocks can get you where you want to be financially sooner. Although it can be a little more risky at times, there is a lot of merit in them. There are some very well established and reputable dividends to invest in, so be a savvy investor and do your due diligence and reap the rewards.