Dividend stocks sound like great investment options, but they can be dangerous. Investors lured in by a high yield could be in for a surprise if the company decides to go on and cut its dividend. After all, there’s no guarantee or promise that a dividend will continue being paid. Even if payout ratios are low, a company could decide it needs to free up cash in order to finance a big acquisition or investment.
Ultimately, investors should like the business that they are investing in, and not just focus on the dividend. A poor dividend stock that’s dropping in value won’t get you far ahead if you’re simply using the dividend income to offset those losses.
In many cases, you’d be much better off investing in growth stocks than you would be dividend stocks. A quick look at how Alphabet Inc (NASDAQ:GOOG) and Apple Inc (NASDAQ:AAPL) have done over the years should offer quick reminders as to why growth stocks can be far superior to dividend stocks.
While dividend stocks that grow over the years could help you benefit from the effects of compounding, it’s hard to forecast out decades in advance. While BCE Inc. (TSX:BCE)(NYSE:BCE) might be a great dividend stock today, who knows how competitive the company will be 20 years from now.
Investing in dividend stocks isn’t without risk, since often you’re making an assumption that the dividend will continue to be paid, whether over a year, or over a decade. It’s not unlike the risk you might take on with a growth stock that’s expected to continue to grow its sales.
