The Most Important Dividend Advice You’ll Ever Get

In investing, as well as in most of life if something looks too good to be true, it probably is.

Nowhere is this more true than in the world of high-dividend stocks. A generation ago, investors looked to the bond market for income. That made sense when you could get a safe yield of 8% or higher. But at today’s puny yields, bonds aren’t going to cut it for most retirees. The 10-year Treasury yields about 2.1% as I’m writing this. That means you’d need to have $3.6 million invested just to generate an income of $75,000 per year.

Well, that’s a problem. Most retired investors don’t have $3.6 million. In fact, most don’t have one tenth of that. So they’ve been committing that cardinal sin of investing: They’re chasing yield in high-dividend-paying stocks.

Let’s say that you find a stock yielding a fat 10% in dividends. You can generate that same $75,000 with just $750,000 invested. Now, that’s still a lot of money, of course. But it’s a lot less than $3.6 million.

But there is a problem with this. Remember, bond interest is a contractual obligation. If the bondholder doesn’t pay you, you can sue them. And if they fall into bankruptcy, you are first in line to get paid.

Not so with dividends. A company can cut its dividend at any time at the discretion of the board of directors. And as an investor, there’s not a thing you can do about it.

Dividends get slashed all the time. According to Street Insider, 837 companies have cut or eliminated their dividend in this year alone, including large players like Freeport McMoran. As recently as August, Freeport McMoran was yielding nearly 10%. Well, that was before they slashed the quarterly payout to just $0.05 per share. Earlier this year, the payout was $0.313 per share.

I’m not going to tell you to dump all of your dividend-paying stocks. But I am going to give you some advice on how to better think about dividends.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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