Monday, 14 October 2013

7 Common Faults in Dividend Stock Investing

1. Tempted by cheap price but forget value. Average consumers like you and me are often good at recognizing a sale on favorite products, but when it comes to stocks we aren’t always value minded. There are various standardized metrics for valuing a stock, and it’s not that difficult to analyze if something is on sale or not. Do your homework and mind fundamentals like revenue growth, profit margins and potential to increase earnings.

2. Rushing in.  If you have done your research and prepare to buy 100+ quality dividend stocks, you don’t need to buy them all at once. Maybe you load some and then wait and see what happens. This is a strategy used by the professional all the time. An effective way to control urge is to simply set a max limit for investing for a period. Of course there is risk that the stock will go straight up, leaving you with foregone profit on the additional shares. But the opposite could happen too!

3. Load all cash in.  We all heard and believed that "Cash is the King". However, to fully appreciate that, it may take painful lessons. If you have unlimited resources, it is not a problem then. But in most cases, please do keep some level of cash as opportunities can present themselves in most unpredictable time and manners. It is true that keeping cash will reduce the current total dividends received, but patience and skills will be rewarded. Do not feel frustrated if you have missed the golden opportunity when every dividend stock seems so cheap in last market distress.Well, you just have to wait. What if you have missed a bus? What do you do? Run and chase and hope the bus capitain will stop and let you on? or lose patience and call a taxi at higher cost? or to give up the journey all together? The best strategy is that you wait for the next one! It's set to come in more or less certain time. Likewise, Mr. Market is for sure to get crazy every few years. When Mr. Market is having a major panic again, have your sweet time for shopping, that is, you have money in pockets! Too bad if you have spent all your cash. Patiece, Patiece, Patiece.

4. Eye for "Hidden Gems". Just because it is a company on a growing path or undervalued a big time, doesn’t mean you should like its stock. More importantly, dividend investors must exam if the companie's earning is recurring or not, and its cash flow, dividend policy and history. For dividend stocks investors, there are not so many hidden gems there for you to discover, especially in a small market like Singapore. The good quality dividend stocks are known to every one. There are no secrets. What you need to do is to wait in unlimited patience, get in on the right time, and hold in extrodinary perseverence. A principle as simple as that, and yet easier said than done.

5. Putting too many eggs in one basket.  You have heard this saying before. You probably heard the strong opposite opinions too. To concentrate or not? It is a question. For short term or even medium term investors(traders), they need to have concentrated positions to gain exposure to market volatility. However, if you are investing for income for long term, diversification makes more sense to outperforme in long run with less volatility.

6. Chasing yield instead of growth. As interest rates remain low, investors have fallen particular prey to this trap. Don’t be fooled by something that is paying substantially higher than you can get in other investments. If a company is using all its cash to pay a quarterly dividend it is possible that pay out will eventually be cut in order to pay other bills. Don’t be taken by surprise and lose both dividend income and share value. Instead focus on high yield growth stocks for better appreciation. The things that should not last long will not last long.

7. Fall in love with your stocks. While constantly moving money around is costly, a “hold it and forget it” strategy can be just as damaging. Even worse, some investors forge an emotional attachment with their stocks. Have you ever felt difficulty in selling some stocks that have been very loyal and been through many up and downs together with you. Come on! Always let the brain rule the heart in the field of investing.
 It does not matter if you see the stock or not,
it's listed there,
with no emotion.
It does not matter if you miss the stock or not,
the history is right there,
not going anywhere.
It does not matter if you love the stock or not,
the love is everywhere,
not felt in here.
 

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