Dividend Stocks and Stop-Losses

Dividend-paying equities are traditionally thought of as being less volatile than other stocks, as their yields give them stability. Ironically, in recent months the expectations game has affected them even more than the rest of the market. One explanation is the now widespread use of stop-losses by conservative investors. These sell you out when a stock falls below a certain level. “Trailing” stops in particular have become very popular, as the stop price constantly ratchets up as the stock’s price rises.

More than a few income investors have fallen prey to the misconception that stop-losses will protect them against downside in their dividend-paying stocks, which they’ve grown progressively fearful of in an environment of rising prices. Unfortunately, setting a stop doesn’t guarantee a specific exit price. All it really does is assure you’ll be sold out if a certain price is breached. If there’s enough volume at a certain level, a relatively minor drop in a stock can quickly turn into a waterfall decline, as sell orders temporarily overwhelm the buyers. Your actual selling price can be well below your “stop” price.

Source: Investing Daily

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