The myth
Dividend stocks offer regular payments of cash or more stocks to investors. This is an additional source of income on top of the potential to earn money from capital appreciation, or the increase in stock price.
However, not all publicly-listed companies issue dividends. This is because not all publicly-listed companies are profitable enough to share profits via dividends.
So the ones that do, especially on a regular basis, tend to draw in investors who are looking for additional and steady streams of income. The periodic payouts create an impression that dividend stocks are more stable and therefore always a safe choice.
The reality
Companies listed on the Philippine Stock Exchange are not required to issue dividends to shareholders. This means dividends aren’t guaranteed.
These listed corporations’ board of directors ultimately decide how much to share to investors. They can be generous at times, but they can also decrease the dividend rate or even stop dividend payments.
Take note that Real Estate Investment Trusts are an exception. They’re required by law to issue dividends from 90% of their distributable income.
Even if a company has a good history of paying dividends, this might not automatically make them a safe option. Here are a few possible risks to consider before deciding to invest:
- Dividend stocks are not immune to market forces
When buying dividend stocks, the regular payments may cushion any drop in stock prices. If things go well, the payouts can maximize your returns.
However, a major downturn or negative event can put the dividends at risk especially if an affected company needs to cut expenses.
- High dividend yield isn’t everything
Dividend yield is the amount of dividends a company pays out relative to its stocks. Though a high yield may seem generous, it isn’t always a good sign.
A huge rise in dividend yield could mean trouble for a company. The yield might be growing because of a drop in stock price, which might indicate that investors have low confidence in that company's future.
- Growth potential may be limited
Dividend payouts may limit a company’s ability to reinvest its earnings in research, development, or expansion efforts. This strategy might curb long-term growth and make these stocks less attractive for those seeking capital appreciation.
- You’ll need to diversify
Relying heavily on dividend stocks might overexpose you to specific sectors or industries. You may want to consider non-dividend stocks or other investment options that can help you diversify.
Verdict: False.
Stocks are affected by different market forces no matter if they pay dividends or not. Dividend stocks are not exempted from risks, and so it might not be a good idea to invest in a company just based on dividends alone.
If you’re thinking of buying dividend-paying stocks for stability or regular income, keep in mind other factors to consider. It’s good practice to look at a company’s fundamentals and the trend of its dividend payouts before you invest.
