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We all like high dividend paying stocks. Who doesn’t?

Studies show that high dividend paying stocks outperform S&P500 in the long term but one should avoid these rookie mistakes:

1. Buying a stock that has totally crashed in stock price that results in a high “dividend yield.

Example: Company A that has serious problems announces that next quarter profits and has to make som writeoffs will probably go down in stock price. The dividend yield however increases as the stock price declines because the company hasn’t slashed its dividend yet. A random investor buys the stock with a dividend yield of 10% at that moment. One week later the company announces that dividend will be suspended.

This happened to many financial stocks during the storm of the financial crisis. The majority of them cut their dividends and went further south. Anyone who thought about high dividend investing during that period would have lost a substanial amount of money.

A good example of a high dividend stock that declined in price thus yielding very high and later got its divdend suspended is Capital Trust.

Capital Trust was a typical pseudo - high dividend paying stock.

2. A moderate company with no growth prospects. The company hasn’t raised the dividend in the last 10 years but the dividend yield is higher than average. In my book it’s still a stock to avoid. A company that doesn’t grow nor raises its dividend will probably not beat the major indexes over the long term.

I rather buy a company with a future and a dividend below average that is growing with more than 10% a year.  It’s also a known fact that dividend growers beat the general stock indexes over the long term. The dividend growth is another discussion.