investing in dividend-paying companies is always a great way to earn passive income but you have to remember that there are never any guarantees when it comes to investing in the stock market and there's always risk associated with it.
TOP 3 DIVIDIDEN INVESTING RISKS FOR BEGINNERS
so even if you do all the research that you can and you find a company that's historically paid out dividends for the last hundred years it still doesn't guarantee that you're going to get those same results for the next hundred years.
now because there's always risk when it comes to investing i wanted to make today's article on the three most common risks that are associated with dividend investing and they're always going to be there no matter how much research you do on a specific company.
Dividend can be cut at any time
so one of the worst things that can happen to dividend investors and this is the first Dividend Investing Risks that i want to talk about is the fact that the dividend can be cut at any time meaning the dividend can go all the way down to zero or they could cut it significantly and you don't have any control over when or how this is actually happening.
so let's pretend that you were invested in a company for a while now where they've always paid you a thousand dollars a year in dividends well all of a sudden even if you're expecting a thousand dollars they could drop that down to 500 250 or even zero and you have no control over this.
because like i said it's at their discretion so no matter what's happening in the economy even if the company's profitable they still have the control to reduce or cut those dividends at any time no matter what's happening.
so even though the shareholders are never going to be happy whenever there's a dividend cut sometimes the companies just have to do it out of drastic measures or maybe it's just time for a change and we don't have control over that.
i will say though as a dividend investor that you always want to do as much research as you possibly can on the companies that you're going to be investing in.
because honestly if you look at their track record and you can see that they have a good dividend history that's always been paying out no matter what's being seen in the economy.
then it's probably going to prove that way in the future but like i said that never is a guarantee.
unforeseen things can always happen to any of the companies that you're invested with and that's just the way that it's always going to be because there's always risk associated with investing.
as an example if you look at disney they've paid out a consistent dividend since 1982 and they were on track to be continually paying out those dividends.
but then all of the sudden in 2020 they had to randomly shut down all of their parks because of the events that happened and because of that they had to take drastic measures and cut the dividend.
so it was something that none of the investors were expecting but because of the events that occurred they had to take those drastic measures and cut the dividend.
now hopefully it will be reinstated in the future we just don't know when that's going to happen because obviously nobody can predict the future.
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Dividends might not increase over time
now the next Dividend Investing Risks you should avoid that you'll always see when it comes to dividend investing is the fact that the dividends might not increase over time.
meaning they're not going to keep up with inflation or you might see really good profitability from the specific company and you'll still see the dividends stay exactly the same over time.
that's not a good thing because over time as the share price goes up you do want those dividends to increase as well. typically you are going to see dividends increase just a little bit over time because that's what you want to be seeing but i have seen companies where for a few years the dividends will actually stay stagnant and that's what i want to warn you about is that there is a risk that the dividend might not increase even if history shows it.
so when you are researching a company it's a good idea to look at their profitability year over year because generally if they're becoming more profitable then they're going to share some of those profits in the form of dividends, meaning they're going to have dividend increases.
now on the flip side if you see that they're becoming less profitable every single year then that's a high probability that they're probably going to end up cutting the dividend reducing it or maybe they're just going to leave it the same for a while until they can become more profitable.
sometimes you might even see that the profitability is going up but the dividends are still staying the same and one of the reasons that this might be happening is because the company is using that profitability to actually put it back into the company as more of a growth strategy rather than sharing it in the form of dividends and this is not the most uncommon thing either.
so just remember that no matter what the history shows as far as dividends go it doesn't mean that the future is always going to stay the same or as consistent as what you're used to seeing.
Timing of the payouts
now the third Dividend Investing Risks when it comes to dividend investing is specifically on the timing of the payouts.
meaning if you're used to getting paid at the beginning of the month from a specific company don't rely on that 100 because things can change in the future.
so let's pretend that you invested in a company 10 years ago and they've always paid out quarterly dividends meaning every three months you expect to get a dividend payment from them.
well all of a sudden even after 10 years they might change that to every month every six months or maybe even once a year and that's something once again that you don't have control over.
so all i'm saying here is that if you're relying on the timing of dividend payouts to pay different bills then just don't expect it to always be that way in the future and try to have a safety net or something like that so if something does change then you're safe and you can get those bills paid.
like i said earlier dividends are fairly predictable when it comes to their past history so if you see that they've consistently been paying them every quarter then it's probably going to be like that in the future.
but like i also said dividends are never guaranteed and things can always change because we don't know what's going to happen in the future.
Reminder!
so just remember that no matter what company you're invested in there's always the risk that the dividend can be cut at any time maybe they cut it out completely or they just reduce it there's also the risk that the dividend just stays flat and it doesn't grow over time.
there's also the risk that the timing meaning something that you're predicting might change maybe they go from every quarter to every year.
that's totally normal and those risks are always going to be associated no matter which company you're investing in.
So keep in mind these top 3 Dividend Investing Risks for beginners to stay alert for your investment.