Dividend Income Lessons I Have Learned

One of the reasons I love the investment process so much is because every time I turn around I realize that I have learned something new. Just when you think you have “the game” down, something comes along and knocks you on your ass. Take those dividend cuts by Bank of America, Citigroup, and General Electric for crying out loud. GE was never ever supposed to have to cut its dividend. But it did and many of dividend investors learned a valuable lesson – never assume that dividend growth, even from the largest of blue-chip companies, is a foregone conclusion. That is the one of many dividend investing lessons I have learned through the years. Here are a few more I came up with.

1. Diversified dividend income is more important that growing dividend income

It does not matter how fast or how high that dividend growth is for a particular company if you are not diversified. As I to some extent, and many others like me learned, in truly awful markets broad diversification through a solid asset allocation is what is most important. No amount of dividend growth will make up for a portfolio that tanks by 75% because of improper asset allocation.

2. The term blue-chip is only a media title, not an investment philosophy

I believe the term “blue chip” has done great damage to many investors. It has created a sense of safety that lead people to drop their guards. This false sense of security creates huge risk in many a portfolio. I have learned not to get sucked into the feeling of safety by media labels placed on stocks. The numbers are what tells me if a stock is good or not (and even that can be a problem).

3. Even the best stock analysis can lead to stupid decisions

Mutual fund companies are very good at convincing us that investing is hard. It really isn’t as hard as they make it sound. The most important things is to ensure you have a sound asset allocation. With that you will be off to a good start. However, really good and reliable stock analysis takes time and even done with the highest degree of rigor can still turn out to be bad calls. At the end of the day it is very difficult for us as investors to foresee what the market will bring us.

Finally, because of these difficulties I have learned that I must form the core of my portfolio with broad based index funds across a number of asset classes. This provides effective diversification that is not tied to guessing what the market will do and not tied to a media label such as blue-chip. I still actively invest in individual dividend stocks, but I am always certain that my core is strong so that the benefits of dividend growth will not be overshadowed by a bad portfolio.

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