The Risk and Reward of Dividend Investing

There’s a lot of money to be made on the stock market. You buy a stock low, wait for it to run up, and then sell high to lock in a nice capital gain. It’s what most people think of when you mention stock market investing. But there’s another means of generating profit from stocks with a distinct advantage over capital gains: dividends – the regular payouts a company pays to its stockholders. Their advantage? While locking in a capital gain requires the market to move in a particular direction (up if you’re long, down if you’re short), earning income from dividends requires no market movement at all – only the passage of time.

Even though profit can be earned from dividends regardless of market direction, it isn’t entirely free from risk. There always exists the clear and present danger that the dividend will be reduced or even cancelled. To makes matters worse, a reduced or cancelled dividend will not only slash the income you were counting on, but will also wipe out a large amount of the capital you have invested. A stock’s price is elevated by the anticipated dividend. Should that dividend be cut at some point, you can bet traders will adjust the price of the stock to a lower value inline with the lower dividend payout. So what good is it to gain 10 percent in dividends one year only to lose 20 or 30 percent of your entire capital investment the next?

Source: Wealth Daily

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