Dividends The Good, The Bad and The Ugly

Dividend investing was something crazy popular and something that was drilled into our heads to do for my generation. The thought of being able to earn enough from your dividends to live a passive income lifestyle was all the rave. But there was a dark side to it and something many people don't talk about.

Let's clear up some math here on Dividend stocks and how it works.

For example let's take a stock trading at $100 a share and that the company makes $5 per share in profit. It was a dividend to shareholders payout on Nov. 15th of which the company will be keeping $1 per share for future growth of the company while $4 per share will be paid out to stock holders in the form of a dividend.

On Nov. 13th the ex dividend date that means you have to buy the stock by Nov. 12th to get the dividend. That means on Nov. 12th the stock trades for $105 because of the $5 profit per share. Come Nov. 13th the stock goes ex-dividend meaning the stock should trade for $101. Now granted there are outside factors that play into this such as news and normal trading but if there was zero real trading then the above numbers would stand correct.

The Good

Dividend investing can be a great way to build revenue streams and create passive income. There are tons of options and when banks where paying 2% or less for years on your savings account dividends made sense even if they where 4% as you essentially were doubling your investment revenue compared to holding it in the bank.

Dividends do offer up the ability to create liquid cash on a somewhat predictable means. Unlike buying growth stocks that can gain and fall quickly a dividend for the most part can be counted on if it's a good solid company. However it does hold risks as well especially those high yield REITs.

With dividends it brings the value back into share holders hands. You see without it the stock value would simply go up because the overall value of the company has gone up. However investors only see it in the stock price and are forced to hold or sell the stock to collect earnings. While a dividend payout will allow the share holder to do with it as they want. They can either invest it back into the company, leave it as cash, buy another stock with it etc. So as an investor you have more choices and flexibility.

The Bad

The biggest downfall for dividend paying stocks is the company doesn't reinvest all of those profits back into the growth of the company. Instead the company only keeps a small amount and in the case of REITs it's required by law for them to pay out 90% of the earnings to investors while only keeping 10% for future growth of the company.

It's thought that with non dividend stocks that the company has much more cash flow to make choices of growth. But that's not always the case and you're putting all of those profits back into the hands of the company to make that choice for you. If that company does a bad job you can see your profits crushed quickly.

The Ugly

High yields can be attractive. Heck some REITs and other dividend stocks pay as high as 20% and more. But normally these are companies in trouble and you'll quickly see that 20% yield do two things. The first the yield percentage might come down so over time it changes into 10% or worse and the other factor is the stock price itself will most likely continue to fall.

It is extremely hard to find a good dividend payer that also increases in value on stock price by any meaningful amount. However they do exist. I would highly caution you to do extra research if a stock is reporting over a 6% dividend yield as it can often be because of price drops in the stock recently or other factors you will want to research before seeing your investment erode.

*This article is for entertainment purposes only and is not financial advice. Do your own research before investing.

Posted Using InLeo Alpha