How to Limit Risks Investing in Dividend Paying Stocks

Many investors feel that purchasing dividend paying stocks is a way to automatically limit any risks when investing in the stock market. After all, since a company can pay a portion of its earnings out to shareholders, it must be in good shape. This is actually one of the biggest myths when it comes to dividend investing. Investing in the highest dividend paying stocks without first analyzing the company's fundamentals is a perfect way to lose money!

So how does an investor go about limiting their risks when making an investment in dividend paying stocks? There are several simple steps that a dividend investor can take in order to limit their risks. Here are a few basic steps that any investor can use in order to maximize their gains while limiting any associated risks.

Difficulty: Moderate

Instructions

1. Invest in dividend paying stocks that have a solid history of raising or maintaining distributions. Try to avoid companies who historically have raised and lowered dividend payments often as these are often unstable companies. You want to avoid these riskier investments which is why it is important to validate a stocks dividend history.

2. Search for dividend paying stocks with a relatively low price per earnings ratio. It is important to not only review the current P/E ratio but also look at the projected ratio as an indicator of the value of the company. A good indicator to start with is to select companies with a P/E ratio of 20 or below. Keep in mind that different industries and sectors may vary, so check out the competitors in each market for a better gauge.

3. Create an investment strategy when you are buying and selling dividend paying stocks. This should be done for any kind of investment you plan to make, not just in the stock market. Identify certain thresholds for buying and/or selling a particular stock. For example, many seasoned dividend investors will immediately sell a stock if a dividend cut is announced. The important point is to establish guidelines and stick to them!

4. Purchase securities in what you know or have experience in. This is a tip normally given out by professional investors and can be leveraged when investigating dividend paying stocks. Knowing and having a clear understanding of what you are investing in will go along way to limiting your risks in the market. Having experience and knowledge in particular industries and sectors will give you an upper hand on other investors.

5. Select dividend paying stocks that have a strong earning growth projection. While no investor or analyst can predict the future, using forward looking calculations can help limit your exposure and risks. Dividend investors should be looking to invest in securities that have a bright outlook and whose future earnings can support the current dividend yield. Use these numbers in combination with other criteria to make your decision.

Tips & Warnings

• Look for dividend paying stocks from exchange traded funds that specialize in high yielding securities for investment ideas.
• There are no guaranteed investments in the stock market. While investors can take preventative measures to lower their exposure, a certain amount of risk will always remain.

Resources

• Learn more About Dividend Paying Stocks!