As with any investment, stocks tend to carry their risks. Many companies, to conserve the surplus funds they have, would limit the number of dividend payments they make. Add to it the volatile market conditions that leave lesser and fewer opportunities for increasing profits. Or rather, fewer possibilities to provide a consistent and steady revenue source, for companies, and in turn for its investors.
Some of the risks involved in investing in dividend stocks are as follows:
- Dividends earned by shareholders are taxed by the Government. So your net income from this investment source would be lesser when you do the right calculations.
- Companies that are supposedly doing well, may at some point in time, because of various factors – natural or human-made, might collapse and their share prices would slump. This would result in three situations at the same time – depreciate the actual value of your investment, put you in a position where you do not receive any dividends at all, and thirdly, the company might lose shareholders who are interested or even entirely dependent on the dividend payouts.
- Businesses need to ensure their constant growth, which in turn would result in the non-stop availability of funds, for reinvesting and for bonus payoffs. If companies stagnate or become bankrupt, then without development and progress, there is no shareholder or dividend, and that is risky for everyone entangled in the equation.
- Whatever investments you make must be in tune with the inflation rates of the economy, else the value of your savings would not be as much as you expect them to be.
- Lastly, keep in mind that no company is bound legally to pay dividends. They can reduce the payout or eliminate it at any time.
Dividend stocks look good and do a lot of good to your portfolio. But be prepared mentally and financially with knowledge about the risks involved with them. Make sure you have other kinds of investments to fall back on. Or, choose between earning lower returns with safe dividend stocks or higher returns with high-risk companies.