As from April 2013 my Journey in Investing is to create Retirement Income for Life till 85 years old in 2041 for two persons over market cycles of Bull and Bear.

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This blog is authored by an old multi-bagger blue chips stock picker uncle from HDB heartland!

"The market is not your mother. It consists of tough men and women who look for ways to take money away from you instead of pouring milk into your mouth." - Dr. Alexander Elder

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Value Investing
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Friday, 22 July 2011

Dividend Yield is good but avoid falling into potential Dividend Traps

Re-posting this article under different label after reading an email from one reader.

In the stock market where does the Money come from?

A picture is worth a thousand words. When you see a picture, it will strongly embedded in your mind for a long time




As you can see from the picture. Companies DISTRIBUTE stock dividends and other Investors/Traders in the stock market all together significantly CONTRIBUTE to the capital appreciation of stocks. The amount of money distributed by companies is pale compared to the amount of money contributed by other investors/traders.

Firstly, you are either contributing to the market or are taking contributions from the market.
 
Secondly, are you aware of possibility of falling into potential dividend traps?
 
I think one reader has become aware of potential dividend traps from the following sentences in his email to me.  
 
" ...  I was led into thinking in the long run, the total return on a stock is mostly from the dividend return and not from the capital appreciation. I think I read it in Jeremy Siegel's books, if I'm not wrong. But since 2009, my real experience tell me, it's not true."

5 comments:

  1. Do you mean the trap of JUST depending on dividends for returns? ~RD

    ReplyDelete
  2. Hi CW8888
    I think if you are investing in the market mainly for replacing lost earned income, as some retiree do, it is quite a good proposal, especially at this very low interests return from the banks now.
    In some years you may have less dividends, then spend less lol in those years. Strategically, you should have some other "IGAs" too.
    And if the market has a new Bull's Peak, you are the special type of investor who will be riding the Bull all the way from the market to the bank. The problem (but a happy one) now is where to park your money?
    Do you dare to hold for dividend until the new Bull's Peak appears and then sell?
    Or are you afraid of getting caught by the sudden Black Swan? i think i should try a little bit for the former at least once in my lifetime.
    If you are caught by the Black Swan, relax, you will still have some dividends, albeit the market has crashed.
    Viable investing or speculating dream?
    Anyone dare to try?

    ReplyDelete
  3. I have written on it before. Not every investors really need passive income during certain part of their investing journey.

    Read? Do some retail investors really NEED stock dividends as INCOME?

    ReplyDelete
  4. Hi CW,
    Investing for growth and dividend is the best. Of course for a young man investing for more growth than dividend may be O. K. He still has a lot of earning power. But he should be awared of this eternal verity of investment proverb by Alex J. Pollock:-
    "Profit is an opinion; cash is a fact."

    ReplyDelete

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