The Disadvantages of Dividend Stocks - dummies

The Disadvantages of Dividend Stocks

By Lawrence Carrel

Although dividend stocks are generally less risky than non-dividend stocks, they do carry some risk and may not hold sufficient promise of rewards for some investors. To make a well-informed decision of whether dividend stocks are right for you, consider not just their pros, but their cons as well.

Whenever you sign on the dotted line with a broker, mutual fund manager, or other intermediary, he usually presents you with a long disclaimer that basically boils down to a single statement: “Past results are no guarantee of future performance.” In other words, yesterday’s winner can be tomorrow’s loser. Investing always carries some risk, and dividend stocks are no exception. A few dangers to be aware of:

  • In general, dividend-paying companies see less price appreciation than growth stocks.

  • Share prices can drop whether the stock pays dividends or not.

  • Companies can slash or eliminate their dividend payments at any time for any reason. As a shareholder, you’re at the end of the line when checks are cut.

  • Tax rates on dividends can rise, making dividend stocks a less attractive option — for the company to pay and for you to receive.

Not investing also carries risk. If you stuff your money in a mattress or bury it in a coffee can in the backyard, someone can steal it or mice, bugs, or inflation can eat away at it.