In recent years, the "stock" atmosphere prevails, many new entrants to the stock market, small-scale investors and office workers, in order to have an additional source of income in addition to their own salaries, will choose to invest their funds in high-interest stocks.。The rate of return is higher than the bank's time deposit rate, and the annual dividend can be stable, attracting many investors to the path of depositors.

This article collates three possible investment pitfalls in high-dividend stocks for your investors' reference.

What is Dividend Dividend?

Dividends, dividends, payouts, or ex-rights, collectively referred to as Dividends, are similar to dividends and refer to the distribution of a portion of a company's profit surplus from the previous year to all of the company's shareholders.

As long as you own the company's stock before the ex-dividend date (Ex-dividend date), you will be able to participate in the company's dividend on the ex-dividend date and receive dividends;

General dividend payment methods can be divided into two types.

• Cash Dividend (Cash Dividend): The Company distributes to shareholders in the form of "cash," which is synonymous with dividend, ex-dividend and dividend.
• Stock Dividend (Stock Dividend): The Company's distribution to shareholders in the form of "shares," meaning rights issue, ex-rights, dividends

Among them, dividend payment (Cash Dividend) can be said to be one of the focus of investors.。A high-quality company, as profits continue to grow, the stock price will rise.。If the company were able to distribute some of its profits to shareholders each year, investors would be able to make the difference and earn dividends.

Formula for calculating dividends

The difference between cash dividends and stock dividends is that the first is the distribution of cash and the second is the distribution of shares to shareholders.。Therefore, the calculation methods of the two are also different

Factors Affecting Dividends

The most direct factor affecting the level of dividends is the company's profitability, and investors should observe the earnings per share (EPS) in the company's financial metrics.

Earnings per share (EPS) refers to "how much money is made per share" and represents a company's material profitability.

Usually a growth-stage company will not distribute all of its profits to shareholders, but will use the retained profits for other investments that will enhance the company's future profits.。For example, expanding a plant, buying new production equipment, or developing a new product requires large sums of money

However, as the company's annual profits improve, it will be able to pay more dividends back to shareholders.。Therefore, when investors look at a company's past dividend payments, they should also look at the company's past profitability, rather than focusing solely on high interest rates.

Three Common High Dividend Trap

The high dividend trap is simply that companies pay high dividends and attract investors to buy, but after the ex-dividend (Ex-dividend date) has been showing a state of discount, the stock price has been falling.。At this point, while investors receive high dividends, the value of the stock has been declining。In the end, although I earned a dividend, I lost the spread and ended up losing money.

"Discount" refers to a situation where, after ex-dividend, the share price has not yet recovered to the pre-ex-dividend share price.。Generally, after a company pays a dividend to its shareholders, the value of the company's stock decreases on the same day, and the share price decreases as it opens.。Therefore, a stock that pays a high dividend does not necessarily mean it is worth investing in

Trap 1: Weakening fundamentals

Typically, when companies announce their dividend policies, they base their decisions on last year's earnings。However, it should be noted that the ex-dividend date is usually in the second half of the year, and if you find that the company's earnings have begun to show a recession in the first half of this year, be careful about the company's ability to pay dividends next year.

If earnings go wrong, even if you can issue a high dividend this year, you may not be able to maintain the same dividend level next year.。In case the company goes from profit to loss, the share price may have to be discounted。In other words, after the ex-dividend, the stock price not only did not rise back to the price before the dividend, but all the way down, evolved into a dividend, lost the principal.

Trap 2: One-time out-of-business gains

One-off gain (one-off gain) refers to the company's sale of equipment and plant, the sale of land or the sale of the company's stock, etc., and the proceeds outside the industry.

If you are selling a project that continues to cost the company money, it will help the company grow profitably in the future。However, if it is the sale of information that can bring profit to the company, such as plant, equipment, so that the company's turnover has increased significantly, it is a red warning.。Investors should be especially careful not to be carried away by the huge growth of EPS

Trap 3: The dividend allotted by the company is greater than last year's profit.

Under normal circumstances, the allotment of this year's dividend would not be the full amount of last year's surplus.。In general, companies will retain some of their earnings for other investments and enhance their future profitable growth momentum.。In general, assuming a company's EPS was $10 last year, the dividends allotted this year will usually not exceed $10

If you encounter a company that does not make that much money, but still pays a high dividend, investors should pay attention to whether the company will make money out of the past, that is, "capital surplus" (Additional Paid-In Capital)

Be careful not to be attracted to high dividends when you encounter this type of company。If a company sends out a dividend amount, which is more than the company's surplus, this may seem generous to the shareholders, but in reality it is just taking the old money out to the shareholders, which is equivalent to using the shareholders' money to pay dividends to the shareholders.

Therefore, it is important to pay extra attention to whether there is something wrong with the company's operations before there is no way to use earnings to distribute dividends to shareholders

SUMMARY

Before choosing a high-dividend company, investors must do their homework in advance to determine that the source of the dividend is due to the profitable growth of the company's own industry, not to one-time out-of-business income.。It is also important to keep an eye on the company's past dividend allotments and whether the profit momentum continues to grow.

If you want to create wealth by holding high-dividend stocks for a long time, it is recommended to choose a company with sound fundamentals, ideally with profitable growth and dividends for five consecutive years, and a yield of more than 5%.