Ten Dividend Investing Mistakes

Most dividend investing mistakes aren’t exotic. They’re the same ten, made over and over by smart people, usually because a big yield looked like a big return. Here they are, with the habit that prevents each one.

1. Chasing the highest yield

The highest yields are often high because the price has fallen on bad news, or because a fund pays out more than it earns. Instead: ask why every high yield is high before buying it. Review Yield Traps.

2. Judging by income instead of total return

Big checks feel like profits even when the investment behind them is shrinking. Instead: look at total return first, yield second. Try it below: a 12% yielder losing 6% a year against a 3% yielder gaining 6%.

3. Ignoring NAV erosion

Many of today’s most popular high yield funds have lost a large share of their price since launch. Instead: compare a fund’s price with what it’s built on, over the same dates. See NAV Erosion: What It Is, Real Examples and How to Avoid It.

4. Concentrating in a few sectors or payers

Utilities, REITs, telecoms, tobacco and pipelines all yield well, and they share risks. Instead: keep any one payer under about 5% of your income and mix growers with steady payers. See How to Build a Dividend Portfolio.

5. Trusting the streak over the business

Kings and Aristocrats have cut before, after years of warning signs. Instead: check payout ratios, debt and sales trends every year, even for famous names. See Dividend Cuts: Warning Signs and Real Examples.

6. Trading around ex-dividend dates

Buying just before the ex-date to grab the dividend doesn’t work: the price drops by about the dividend and the payout is taxed as ordinary income. Instead: buy what you want to own, when you want to own it. See The Four Dividend Dates.

7. Buying funds without reading what they do

Two covered call funds on the same index can behave completely differently. Instead: before buying any option income fund, find out what it sells, how far from the price and on how much of the portfolio. See Covered Call ETF Strategies Compared.

8. Ignoring taxes and account placement

Holding a 10% BDC yield in a taxable account and qualified dividend stocks in an IRA can cost hundreds or thousands a year. Instead: put ordinary income payers in tax-advantaged accounts. See Which Account Should Hold Your Dividends?.

9. Paying too much in fees

A 1% fee on a 4% yielder takes a quarter of your income. Non-traded REITs and some advisers’ products charge far more. Instead: know the expense ratio of everything you own and make every fee earn its place. See What Is an ETF?.

10. Panicking, or forgetting why you bought

Selling good dividend payers in a crash locks in losses and gives up the income that would have carried you through. Holding a broken business because of its past locks in a different kind of loss. Instead: write down why you own each holding. Sell when the reason is gone, not when the price is down.