| Dear Reader, We recently went live with our slightly left-field take on dividend stock investing. If you’ve not seen it yet, go here: The Fat Tail Royal Dividend Portfolio. If you’re going to be in the stock market in the next few years, we reckon this is a sound approach. Because it’s: Better than pure ‘growth’ stocks… You may get lucky with the odd outlier in AI or lithium mining. But, for the most part, for any big gains, there will be exceptions to the rule. It’s ‘the end of growth’, according to Barron’s. That may be overstating it. But certainly, the days of rampant speculation and easy wins aren’t coming back anytime soon… Better than cash in the bank… With markets going nowhere and so uncertain, a 4–5% risk-free return from cash savings SEEMS like a better trade-off. It’s really not. Not long term — with inflation nipping at your heels. Obviously, when you buy ANY stock, you’re upping your capital risk. Especially in this market. But what you have to do is weigh that risk with the wealth erosion taking place if you remain mostly in cash. If you’re heavily in cash in the bank now…you should think about deploying at least some of it into my Royal Dividend Portfolio. Better…even…than the biggest dividend payers of the moment… As the investment press is happy to show you, there are quite a few. ‘ASX dividend shares with yields over 10%?’ gushes The Motley Fool. ‘What could be better?’ But the truth is many large dividend yields are a honey trap right now. It’s always been a misconception with dividend stocks that the highest yield is best. Now…with income back at the forefront…and the way this market is poised…even more so. Don’t get me wrong. High yields are alluring. And SOME high-yield stocks are the real deal. But there are plenty of traps out there. For example, is the high yield due to a company paying out ALL of its earnings as a dividend (known as a 100% dividend payout ratio), leaving nothing in the tank for growth prospects? Not ALL stocks that have a 100% payout ratio are toxic. But if that’s the case, you should at least be aware of it and understand why. I’d wager that most investors have no idea about a company’s dividend payout ratio. Which is not their fault, by the way. It’s just not something mainstream dividend stock articles tell you about. Another trap is in looking at past dividends and expecting them to continue at a high level. But often, these dividends are the result of a short-lived boom in earnings. Often, in buying these divvy payers, you’re making a very bad long-term investment for a couple of paycheques. And it may well just be a couple… Many people who buy purely the highest dividends right now could well see those dividends disappear next year…as the companies issuing them see tougher times and are unable to afford them. My Royal Dividend Portfolio is a Plan B. You can see what I mean by clicking here. Regards, Greg Canavan,
Editorial Director, Fat Tail Investment Research | 