Dividend investing can be a very powerful method in the stock market that can help you to generate a monthly income from that market, but many times people who do invest in dividends make these two mistakes.
The first mistake that new income investors will make is simply not checking the Fundamentals.
It can be extremely alluring to go find a list of dividend paying stocks and buy every single stock on that list. But sometimes that works against you. Many companies will increase their dividends in order to get more investors for whatever reason; their goal is not always to benefit the stock holders.
Some of these companies will only increase the amount they pay out in order to help save the company from declaring bankruptcy by getting new people to invest money into it. This means that a lot of dividend stocks might actually be poor companies trying to save themselves from going under.
It really isn’t going to do you any good if you buy a stock that offers an 12% dividend and it goes bankrupt during the next 6 months. So be careful, many times high dividends can be a trap.
You can reduce this risk by taking a look at the individual company. Is it a company which is small and not really making money ? Or is it a company making money growing every day and has little or no debt.
Many times the growth in a large company can even be more profitable than the dividend it pays off. So checking out how strong the underlying company actually is can be well worth it.
The second major mistake income investors make is only relying on dividends. There are many different methods to generate income on a stock.
In fact the most profitable method is not even dividends. Covered call writing can be extremely profitable, especially if the stock is staying flat and you can sell them over and over again.
What happens when you sell a call is that you are selling someone else the right to buy your stock from you at a certain price on or before a given date. In other words they are paying you a premium to have the right to buy it from you.
Why would someone pay you ? Well because if the stock makes a huge move it has the possibility to be worthwhile for them. So if they pay you $3 to buy the stock at $55 and it goes from $51 to 70 they can buy it from you at $55 and sell it at $70.
This does mean that by simply selling calls you are taking a risk that you do miss out on a big move in the position, but unless you believe the stock will make a large upward movement then it can be an extremely profitable situation.
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