Dividend stocks have been quite popular lately and for a good reason. Most quality dividend stocks pay out a consistent amount of money on a fairly set time schedule. Many produce a better yield than high interest rate savings accounts and CDs. Some people have invested solely in dividend stocks as a way to generate passive income and that raises a huge red flag for me. I have two problems that make me wary of dividend stocks right now so make sure you pay attention.
Dividend Stocks are Extremely Popular Right Now
Whenever everyone flocks to a certain type of investment it raises a red flag to me. I am not a stock analyst and I’m not saying that dividend stocks are in a bubble period. I do think this presents a problem to everyone who is invested in dividend stocks. Why?
What happens when the economy picks back up, interest rates rise, savings account and CD rates rise and dividends no longer seems as desirable as they once were? People sell their dividend stocks and put their money in other investments. Whenever an exodus starts from a particular type of investment prices drop. Then when you get out too late you’ve lost a bunch of money that you were relying on for your income needs. Whoops.
On top of that it isn’t just financial bloggers that are singing the praises of dividend stocks. If you ever watch the Suze Orman Show you’ll often see her talking about how dividend stocks are an option. She does make some good points and help many people get their finances on track so I have to give her that. The problem is once I see all of these big names urging people into one particular option it worries me. Shouldn’t everyone have bought a house 5 years ago too? It is the American dream after all!
Dividend Stocks Are Harder to Properly Diversify
If you put all of your money in stocks in general you aren’t well diversified. On top of that, narrowing your selection down to one type of stock makes you even less diversified. Granted you can buy dividend stocks in different sectors like consumer goods and energy. The problem is that you’re still all in stocks and all in dividend paying stocks at that.
I recently read an article in Money Magazine that reinforced my thoughts on diversification with dividend stocks. The article states that not all stocks pay dividends so that limits the options you have. On top of that if you’re looking for the higher yield stocks to increase your income you’ll be poorly diversified between the sectors. If you are invested in some of the more popular dividend funds the article states that you’ll have more than a proper allocation of consumer, industrial and basic material stocks while you won’t have enough technology, financial services, and health care stocks.
I Don’t Invest In Individual Stocks
As I mentioned before I am definitely not a stock analyst and I don’t even invest in individual stocks. You should never take any of my musings as financial advice because I am not a financial advisor. That said, I still hope to at least make you aware of some of my thoughts on why dividend stocks worry me. Dividend stocks might work out just fine and there won’t be an exodus in five or ten years. I just don’t see how that can happen with everyone hyping them up as much as they have been lately.
What is your take on dividend stocks? Do my concerns concern you? If not, why not? Do you think dividend stocks are over hyped right now?