Dividend investing is one of the safer investment strategies, but there are still risks, as Mark Lowe pointed out in “Dividend Investing Simplified: The Step-by-Step Guide to Make Money and Create Passive Income in the Stock Market with Dividend Stocks.”
This 2019 book also argued, “While it is impossible to completely get rid of the risk, it is still possible to minimize our risk exposure. You can do this by understanding the factors that play behind the sentiment in the stock market.”
He also noted that some risks are within an investor’s control and others are not, so we should focus on those we can control or manage. The first manageable risk is human error, which Lowe called the biggest risk factor. These problems include:
- An investment strategy that does not align with investment goals.
- Emotions becoming part of the stock selection process.
- Fear and panic playing a part in decisions.
- Failing to do research and analysis.
- Not monitoring market conditions.
The most important thing you can do to overcome these potential problems is due diligence. Lowe offered the analogy of being trapped in a burning building. If you’re not prepared, you will experience extreme fear and then panic, making matters even worse. For investors, the burning building equivalent is a stock market crash. Those unprepared for a crash are likely to panic and exit the market at any cost.
A second manageable risk involves concentration versus diversification. A concentrated portfolio, with one or just a few stocks or several stocks from the same industry, is risky. On the other hand, a diversified portfolio of stocks from several diverse industries will be safer.
While individual investors have no control over the companies in which they put their money, they can choose the companies in which they invest.
Third, you can invest with your mind rather than your heart. Also, avoid advice from friends and family, as well as anyone who gives tips without doing solid fundamental research. The same holds for advice in the media or because you heard a company has the hottest new thing.
Stay away from what Lowe called the three primary emotions: fear, greed and love. For example, some investors who have done very well in the market for a while take outsized risks. Others may follow the bandwagon into unsuitable stocks. Greed often blinds investors; fear, especially among those who have lost money, prevents them from investing in anything but the most conservative instruments.
Finally, don’t let love blind you either—don’t fall in love with a stock. Lowe wrote, “Bear in mind that your investments are inanimate objects that are not capable of loving you back. But it is quite interesting that these investments can hurt your [sic] and betray you if you are negligent and naive.”
How are dividend payouts collected?
Moving on to another subject, Lowe explained how dividends move from a company’s accounts to our investment accounts.
Cash dividend payments are relatively straightforward; the cash amount is transferred (indirectly) to your broker, and the broker deposits the funds in your investment account.
Stock dividend payments involve a transfer of shares or portions of shares that also end up in your account, and the value of your shareholdings will increase proportionately. Once those extra shares are in your account, you have the choice of selling them or keeping them.
In some cases, companies have Dividend Reinvestment Plans, known as DRIPs. This is an efficient way to increase your holdings in a company, avoiding potential taxes and brokerage commissions. In addition, some companies even offer DRIP members the opportunity to buy new stock at a discount of as much as 10%.
When are dividend payouts released?
There is something of a dance involved in the payment of dividends. After the board of directors decides how much the dividend will be, they announce the amount and the “record date” in a formal press release.
Then, there is the “ex-date.” Lowe wrote, “One day after the record date is known as the ex-date. This refers to the specific date that the stock begins trading at 'ex-dividend.'” In chapter two, he referred to the ex-date as usually being the day before, which is the conventional thinking.
According to the U.S. Securities and Exchange Commission, the ex-date is the day before the record date:
“Once the company sets the record date, the ex-dividend date is set based on stock exchange rules. The ex-dividend date for stocks is usually set one business day before the record date. If you purchase a stock on its ex-dividend date or after, you will not receive the next dividend payment. Instead, the seller gets the dividend. If you purchase before the ex-dividend date, you get the dividend.”
The SEC also provided this table showing the sequence of events:
This is how the SEC described the events in the table:
“On September 8, 2017, Company XYZ declares a dividend payable on October 3, 2017 to its shareholders. XYZ also announces that shareholders of record on the company’s books on or before September 18, 2017 are entitled to the dividend. The stock would then go ex-dividend one business day before the record date.”
Conclusion
Just because you are buying dividend stocks, you don’t get a pass on risk management. Like any other stock or security, dividend stocks have risks; some of those risks can be controlled, and some cannot.
For those that can be controlled, risk management involves knowing the company’s fundamentals, diversifying so that not all your eggs are in one basket and making decisions with your mind rather than your emotions.
Read more here:Â
Dividend Investing: Earning Passive Income
Strategic Value Investing: Value Investing in Mutual Funds
Strategic Value Investing: Finding Value Stocks
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