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November 2, 2015

Be careful when chasing high-dividend stocks

In an attempt to generate more income, many investors build portfolios concentrated in high yielding stocks. But there is no guarantuee that the dividend will be paid – in fact, dividends are more volatile than many believe. For example, it took 7 years for the dividends of the DAX companies to get back to the 2007 level. Investors who need guaranteed returns should not look at the the equity market for easy solutions. Investing in companies that pay high dividends is not a sound substitute for fixed income securities. Placing too much emphasis on an investment’s cash distribution is the wrong strategy for investors.

infografik-dividendensumme-im

If you increase the equity portion of your portfolio, even with so-called defensive dividend stocks, you will end up increasing your portfolio’s risk. Don’t overstretch for yield if it means changing the risk profile of your portfolio to unacceptable levels.

So what to do now? Many investors prefer higher yielding stocks so they can live off the dividends. In fact, capital gains provide the exact same economic benefit as dividends and interest income. High yield securities are not inherently better or safer, so investors should make sure their exposure to dividend stocks is part of a larger diversified portfolio.

FAZ „Dax-Dividendenrekord in Sicht“, 29.10.2015, Daniel Mohr

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