There are many common misconceptions about dividend investing. For example, all dividend paying stocks are stable companies. Or, a dividend from a stock will more than offset any losses you receive in share price over the long term. However, there is one that I find most persistent in both new and experienced dividend investors. It is often viewed as a reason to buy a stock, yet it should never be the only reason. I know I have been guilty of basing a buy decision on this misconception in the past.[ad#tdg-embedded]
That misconception is that a dividend stock that increases its dividend is a good buy.
Please do not get me wrong, as a dividend growth investor one of my most important criteria when completing stock analysis is a long track record of increasing dividends. However it is not the be all and end all that it can seem like when you read a blog like mine. There are numerous other factors that must go into your decision to buy a stock.
Here is just a sampling of some of the other items you need to analyze when making the decision to buy:
– Earnings per share
– Revenue growth
– Cash flow per share
– Debt to total capital
– Free cash flow
– Return on capital
This quick list does not even list the valuation tools you need to utilize like DCF, Graham, or other methodology to come up with a buy range.
My point is that it is not just about the dividend increases. Blindly buying stocks from the Dividend Aristocrats or Dividend Achievers lists will only lead to heartache (overly dramatic pause here!). You need to consider many other factors before buying that company.