September 4, 2008

Fixing dividend investment strategies

Josh Peters, editor of Morningstar DividendInvestor, asks the question "Is dividend investing broken?" Large and small companies alike have cut their dividends this year, he says, but dispelling a couple myths may prove the strategy still has some merit.

Peters addresses two myths surrounding dividend investing. First, to the belief that high-yield stocks are less risky then others he says "Volatility in market prices does not necessarily translate into risk for committed, long-term shareholders, but volatility can tell us something about the risks perceived by the marketplace." This has led to more volatility among high-yield stocks.

The idea that large dividends will protect a stock from falling by attracting enough buyers to offset investors selling stock is also a myth, Peters says. "Dividends are not guaranteed--not by the company, the government, or anyone else. So if the dividend is at risk of being cut--or just perceived as being at risk--there's no floor under the stock price."

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