Dividends4Life: Dividend Traps To Avoid

Dividend Traps To Avoid

Posted by D4L | Wednesday, August 15, 2012 | | 0 comments »

Have you ever heard of what investors call the “value trap”. A value trap happens when a stock is trading at a very appealing P/E ratio. Investors think they have found the deal of the year and they buy it without thinking further. The problem is that sometimes, the stock is a value trap: it’s worth a lot today, but the economics around the stock will eventually lead the company to be less profitable. This is why the P/E ratio will never go higher. Investors are then stuck with shares trading at a low P/E ratio but they will never catch up and go back to a higher multiplier. This is the value trap. Now, there are also dividend traps!

Some investors are so used to receiving their dividend distributions that they forgot they don’t own certificates of deposit and they are not receiving interest. Dividends are not 100% secured. In fact, dividend investing can also bring you big losses. There are some pitfalls you must avoid during your dividend investing journey: #1 The High Dividend Yield Trap, #2 The Being Paid To Wait Trap and #3 The High COP Dividend Trap.

Source: Guru Focus

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