Why People Lose Money Trying to Invest in Dividends

Introduction to Dividend Stocks

Companies that pay out a portion of their profits to a class of shareholders regularly are dividend stocks. This distribution from the company to its shareholders is known as dividend payments and can be paid out in the form of cash or extra stocks. Companies that carry this out are generally well-established with stable earnings and a lengthy dividend payment history. A dividend is usually paid out every 3 months but can sometimes be done monthly, annually or in certain cases, be paid in its entirety as a special dividend. However, in challenging economic periods, dividend stocks may perform dividend cuts to increase the retained earnings and cash account balances until either the situation or the company’s health improves.

On a side note, ever since the pandemic hit, the rate of unemployment has increased, leaving some households without a stable source of income. For those looking to create a steady and passive income during times of financial instability, dividend stocks can be a great investment opportunity.

“The way to measure and rank the top dividend stocks is by looking at the highest yielding monthly dividend stocks based on the measure of dividend yield”.

WRONG!!

This is a financial ratio that tells you the percentage of a company’s share price that is paid out in dividends annually. To simplify this, we can take a look at Apple Inc., the most valuable company in the world. On the 25th of August 2021, Apple’s share price was, on average, around $149 and the annual dividend was $0.88. We can calculate the dividend yield to be around 0.59% by dividing the stock price by the annual dividend and multiplying this by 100. This value is low in comparison to the top 3 dividend yielding stocks we will be looking at below, ranked by its forward dividend yield.

The dividend yield is calculated on an annual basis.

Top Dividend Yielding Stocks

New Residential Investment Corp. (NRZ)

  • Dividend yield – 8.11%
  • Market capitalisation – $4.6 billion
  • Share price – $9.88

New Residential Investment Corp. is a publicly-traded mortgage real estate investment trust focused on managing and investing in investments connected to residential real estate. Its investment portfolio includes mortgage servicing-related assets, non-agency securities, residential loans, and other investments. The company was founded in 2011 and is headquartered in New York, NY.

AGNC Investment Corp. (AGNC)

  • Dividend yield – 8.86%
  • Market capitalization – $8.5 billion
  • Share price – $16.31

AGNC Investment Corp is an internally-managed real estate investment trust, investing in mainly agency MBS on a leveraged basis. They generate income from interest earned on their investment assets, net of associated borrowing and hedging costs, and more. Founded in 2008 and headquartered in Bethesda, Maryland.

Annaly Capital Management, Inc. (NLY)

  • Dividend yield – 10.25%
  • Market capitalization  – $12.4 billion
  • Share price – $8.58

Annaly Capital Management is one of the largest mortgage real estate investment trusts. The company owns a portfolio of real estate investments and supports 2 fundamental foundations of the American economy, business, and housing. It was founded in 1997 and is headquartered in New York, NY.

The next highest yield dividend stocks are around 5-6% dividend yield and below. After reading this you are most likely questioning yourself as to ‘why are the top 3 yielding stocks all REITs?’.

To answer your question, real estate investment trusts have to pay such high dividends because they are required to distribute at least 90% of their taxable income to their shareholders annually.

Why the Dividend Yield is Not Enough

A high yield may indicate that the company is having problems as the yield is dividend per share divided by share price. So the one of the potential factors of a high yield would be a decrease in share price. In my opinion, it’s better to select dividend payers in the 2.5-4% range if they fit in the description I will make down below.

All that said, a low share price may not be terrible if there are opportunities for growth. Buying at small returns and waiting for compounding interest is the ideal investment for a dividend investor. This would enable the real profit to come from dividends without touching the principal investment.

What You Should Be Looking At

When looking into dividend stock selection, companies must have a history of dividend growth and a low payout ratio. The payout ratio indicates the ability of the business to pay its dividends consistently. Imagine my company has 100 euros and we pay you a dividend of 90 euros. We now only have 10 euros in assets, thus we are not a good investment despite our high dividend delivery. The history of growth is obvious as you need to see that this is an investment you can trust. With dividends, more than anything, the research should be done in great detail before making the investment. As the famous saying goes, “the battle is won before it is fought”. Once you have invested in a dividend stock it should only be a matter of patience.

Daniel Seelam, King’s College London

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