Hi Friends,

I started investing in the stock market when I was 18 years old and have done lots of different types of investing over the 15+ years since then.  Investing is an educational process as there are so many things you can learn – puts, calls, short sales, transfer agents, market makers, level  1 -3, dark pools, after hours, etc, and that is not to mention things like financial ratios  – earnings per share, debt to equity, price to sales, market cap, etc.  Investors should continue to expand their knowledge base. 

 
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One thing that many investors have wrong are dividends.  They think dividends are free money and, therefore, the higher the dividend, the better.  Well, in the case of common stocks, that is simply incorrect.

When a company issues a dividend, the stock price drops on the ex-dividend date by the corresponding amount of the dividend.  It is essentially the same as selling that amount of stock each time a dividend is given. 

As an example, if a stock is trading for $10 and it issues a $5 dividend, the stock price will drop to $5 on the ex-dividend date and they will pay you the $5 dividend on the payment date – either way, your total value is still $10.  It is not free money.

Of course, a dividend paying company means it has a business model that is generating sufficient cash flow to return money to investors, which does mean the company is generally more stable and safe, though there are no guarantees. 

Also, if a company is paying dividends in excess of their profits (as happens with many REITs), the dividends are actually considered a partial return of capital and are a portion is not taxable.  

Many investors get suckered into a yield trap when they see a company has a 15% dividend.  First off, the dividend is likely not sustainable and will get cut (or be considered a return of capital), and you now know that the stock will drop by the corresponding amount of the dividend so it pointless to try and chase a wild yield as you will have the same value either way.

Hope this helped someone out there!

Thanks for stopping by,

Brian