4 Investing Rookie Mistakes You Can Easily Avoid

Post on: 13 Март, 2016 No Comment

4 Investing Rookie Mistakes You Can Easily Avoid

Rookie Mistake #1: Look at the Ex-Dividend Date Before Buying a Stock

I bought MCD on May 28 th at a price of $102.15 (amount converted in Canadian dollars). Two days after, MCD hit its Ex-dividend date. The investor who holds the stock on the Ex-dividend date is the one who will receive the dividend payment. So I did buy MCD almost right before the Ex-Dividend date, this means that I will receive MCD dividend payout shortly. However, once the Ex-dividend date passes, the stock usually drops as the money that was sitting on the bank account is leaving MCD to be distributed. This adds pressure on the stock price to drop for two reasons:

#1 Investors may wait until they cash in a last dividend and then sell the stock. If you were to sell a company right before the Ex-Dividend date, you may want to wait a few more days and cash a few more dollars.

#2 Since there is less money in the company balance sheet the day after the dividend payment is made, the stock technically worth less compared to its value the day before.

Let’s take a look at what happened to the stock over the past 30 days:

Note to myself: wait until the ex-dividend date is passed to buy a stock. Since I’m not dripping MCD, I will receive cash, but my investment return on this particular stock will be shown as negative for a while.

Rookie Mistake #2: Be Blinded by a High Yield Dividend Stock

Most dividend investors select stocks to earn revenues. There is no point of building a dividend growth portfolio if you are not looking for the dividend payout, right? This is why beginner investors tend to look for the highest dividend yield possible thinking they are smart cookies to build a portfolio paying 6% dividend or even more!

If you are part of these investors, I would suggest thinking about this strategy twice: we are in a “near-zero interest rate” environment where it is almost impossible to buy quality bonds paying decent interest rates. So why do you think a company would pay a dividend over 5% in such an environment? If you can’t find a logical explanation for a company paying triple what can be found on the market, this is probably because the dividend sustainability is at stake.

Note: never trust a high yield dividend stocks, ask more questions!

Rookie Mistake #3: Focus on One Industry

Regardless of your investing strategies, you should always look to diversify your portfolio. This is true for dividend investors, ETF coach potato portfolios and even for growth traders. The problem with dividend investing is that you will tend to find the best dividend paying stocks amongst the same industries. If I take the Canadian market as an example; most dividend investors will take on three sectors: Financials (Banks, REITs, and Insurance companies), Resources (oil!) and Telecoms. This puts your portfolio at great risk as if one of these sectors runs into difficulties (there is a slowdown in the mortgage industries, China buys less resources than expected and new mobile competitors may enter the telecom market soon), your whole portfolio is at risk.

For US investors, the temptation would be to fill your portfolio with utilities which are great dividend payers with strong balance sheets. I was recently on a crusade to buy techno stocks as well as they have elevated levels of cash in their bank accounts and a will to increase dividends. This is why I bought Seagate Technologies (STX), Intel (INTC) and Apple (AAPL). I recently sold STX since I considered I had too many techno stocks in my portfolio. While these three companies are not evolving in exactly the same industries, they are all linked together in one way or another. Poor sales of PCs will affect both STX and INTC for example.

4 Investing Rookie Mistakes You Can Easily Avoid

Note: Try to diversify your portfolio as much as you can. Your return over time will be more stable and you will likely earn better dividend distributions.

Rookie Mistake #4: Sit on Your Portfolio

Investors making money with their trades become often complacent about their investments and think their stocks will continue to rise forever. Some of them fall in love with companies because of a high return and while the stock stagnates or slowly drops, they look into their brokerage account to show the positive total return of the company from the goods years and find comfort.

The truth may be different; the company you bought 2, 3, 5 years ago could have been a very good investment but it is maybe time to sell it and look for other opportunities. Don’t sit and enjoy the past returns, think about the future of each stock. This is why I’m looking at my holdings quarterly to make sure my portfolio is following my dividend growth model. If a company fails to meet my basic requirements, I consider selling it in the upcoming months. I usually try to find a replacement stock to make both trades the same week.

Note: Building your portfolio is only the beginning, following your stocks and managing your investments is a continuous adventure.

Have You Made Any Rookie Mistakes?

The funny thing about investing is that you can always be susceptible of making a rookie mistake even if you have been trading for several years. I was too busy to make my trades and completely forgot about the ex-dividend date and made that rookie mistake.

Here your chance to leave a comment!