ArjunGaur @ArjunGaur: "Dividends Misunderstood If you have been..."

United Kingdom

Dividends Misunderstood If you have been learning about investing and keen to learn how to accommodate dividend payouts in your decision making, then the following might provide better inputs compared to cognitive biases that tend to creep in otherwise. For any new investors, these might seem perfectly reasonable, but unfortunately you are likely to make these mistakes anyways. The only hope here is you would learn from it and not repeat them again : ) 1. Extra Income or Extra Return Yes, we all want to invest in businesses that provide a safe, passive, predictable and consistent income. And Yes, we want to invest in dividend paying stocks, so that we get paid for doing nothing and getting rich! The old saying on the Wall Street is that there is no free lunch on the Wall Street. So instead of going with your hijack that tells you that you are getting wealthier because you received a dividend, pls remind yourself that the stock price got reduced that day by that dividend amount. So rather than getting rich off dividends from AT&T how about considering Berkshire Hathaway which never pays any dividend but reinvests that capital in generating returns which most investors can only ever dream of! So much so that their A Class Shares are now worth in excess of 500,000 having reinvested all those dividends all along the way >> This is the biggest mistake investors make, trying to avoid any risk of loss on their investment and instead focussing on seeing any cash returns asap even if it comes at the expense of the underlying stock price or worse taking a pass on lucrative investing opportunity by the underlying 'dividend paying business'. Most investors start off looking for that perfect business with perfect dividends, not realising that none exists that might not already be reflected in their initial stock price. On the other hand, very few look into Total Potential Return and Initial Entry Price being core to their survival and potential success. So why do I expect the investors to still make this mistake? Well, if you have entered the financial markets, you are probably thinking of all 'em dividends you keep hearing about. Not to mention, you see some of the investors killing it with 5-10% dividends year after year. Of course, there are always some lottery winners, that doesn't mean you go invest money in buying as many of 'em tickets. Instead of thinking how you are going to earn 5% dividend, it's more worthwhile to think how much money you could potentially loose while allocating capital to that business. 2. Stability or Growth Instead of investing in dividend paying companies, as is often advised, it is much more logical to allocate based on moats the business has to withstand a credit cycle or new competitors. Dividend paying companies are often in stable sectors like utilities and consumer staples which often are recession proof and less likely to be disrupted. Other Market Participants do not know and definitely do not care whether you have earned a certain percentage of dividend, so investing based on dividend payout totally ignores the possibility of your investments being overweight dividend paying sectors possibly at premium prices hurting long term portfolio growth. If you are sized correctly with appropriate diversification, your dividend income would be in appropriate balance with capital appreciation of the underlying stock prices. 3. Too Much FOMO or Too Much Herd Mentality More the number of people investing in Dividend paying businesses like $SEIC (SEI Investments Company) $CACI (CACI International Inc) $LEVI (Levi Strauss & Co. ) $PB (Prosperity Bancshares Inc.) or $RLI (Rli Corp) less is the reliability of identifying a good investment. Conversely, less number of investors, more likelihood of finding a good investment opportunity. For example, markets top out when last buyer has bought in and markets bottom out when last seller has sold out. So if all the dividend investors buy in together, there is no one left to buy, and thus clearing price reverses leading to stock price losses far in excess of the initial dividend. Thus for best investments, look for areas few people are looking or speculating in. Be independent in thinking, see below ; ) i.pinimg.com/originals/59/bc/25/59bc2510418d2130cfcec4c2d110b9a0.jpg I welcome you all to look at my Portfolio and add it to your Watchlist >> I look forward to growing with all of you : )

5 Mentioned

SEIC

SEI Investments Company

CACI

CACI International Inc

LEVI

Levi Strauss & Co.

Prosperity Bancshares Inc.

RLI

Rli Corp