As a total novice investor and having honed my investing through trial and error, which has been fairly costly in this arena I now have a number of criteria I try to fulfil before buying into a stock which has led me to devise the plan I try to stick to now which is the Dividend Policy. I first started out chasing the next big growth stock thinking I could make an exciting and captivating fortune in days rather than slow, dull growth over years. This tends to be through Penny Stocks and as any investor worth their salt knows that this is wholly unreliable and 19 times out of 20 the stock tanks rather than makes any serious gains.
It didn't take long before I realised this strategy was destined to ruination and looked for more reliable or predictable gains albeit at a slower rate. Now nothing in this game is certain and as we all know the value of stocks can go down as well as up and can leave us with nothing, thus the reason why you should only ever invest as much as you can afford to lose, so should I say something I had a better chance of predicting.
Stocks paying dividends are a way to secure cash without so much relying on the movements of the markets so I started turning my attention to these. With dividend paying stocks you receive an income from the shares that you hold (providing they pay a dividend) which can be reinvested in further shares as and when you receive them. Dividend paying companies tend to be larger companies with less volatile share prices and a more solid business structure meaning that they have less of a tendency to see large rises or falls in the share price.
I started out by thinking that when a dividend is announced that money is guaranteed from a company, which it generally is, for that year at least. There is nothing certain about the years to come however and the dividend can so easily be cut.
Again I suffered this fate at the hands of HMV. I looked at them as having a juicy yield (the yield is the dividend as a percentage of the share price) of around 10% which is huge. Needless to say the share price plummeted as HMV have since gone into administration. Fortunately I managed to cut my losses and came out fairly unscathed, many didn't. From this I learnt that you can't take the dividend in isolation and there are many other factors to consider as the dividend may be exceptionally attractive but if something looks too good to be true it generally is. Please see the post shortly for problems with excessive dividends and unreliability.
This scheme I have named the Dividend Policy, there is a reason for this which I'll detail shortly.
Again I suffered this fate at the hands of HMV. I looked at them as having a juicy yield (the yield is the dividend as a percentage of the share price) of around 10% which is huge. Needless to say the share price plummeted as HMV have since gone into administration. Fortunately I managed to cut my losses and came out fairly unscathed, many didn't. From this I learnt that you can't take the dividend in isolation and there are many other factors to consider as the dividend may be exceptionally attractive but if something looks too good to be true it generally is. Please see the post shortly for problems with excessive dividends and unreliability.
This scheme I have named the Dividend Policy, there is a reason for this which I'll detail shortly.
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