Avoid this Buying Mistake in a Down Market

05 Sep 2015 11:39

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So the markets are down and you have some cash. As a dividend investor this is what you have been waiting for, the opportunity to buy stocks with better yield at lower cost!

But there is a word of caution before you invest your money. There are past mistakes I have made and I am sure that other investors have also made the same mistake during market corrections, pullbacks or down turns. WE CHASE YIELD!

A funny thing happens along the way, you have a plan but when you start scanning stocks you start seeing some impressive high yields from reputable companies and in a flash the greed factor sets in. In an instant you find yourself making exceptions to or even throwing out your investment guidelines. Before you know it you fell into the chasing yield trap.

What you end up with is either a company that is in decline (sometimes referred to as catching a falling knife) or company with little or no future dividend growth capability. Personally I ended up investing in companies that fell in both categories and the end resulted in me selling these stocks anywhere from 1 to 3 years later once I realized my mistakes.

The word of warning is DO NOT THROW AWAY YOUR INVESTING PRINCIPLES TO CHASE YIELD! It will be hard but you must discipline yourself. You cannot discount long term dividend growth for short term gains.

A great example was Peoples Bank (PBCT). I purchased PBCT in 2012 and was earning a 4.5% yield, the dividend only grew a paltry 1.6% per year. After holding for three years I realized that my other dividend growth investments had a higher yield on cost and the difference was only going to get greater as time went on. I ended up selling PBCT in 2015 and re-investing into companies with much more dividend growth potential. At the end of the day I had to admit that three years ago I chased yield and threw dividend growth out the window.

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