Sometimes investors lose sight of what their objectives are. Yes, it is hard to believe I know, but even hardcore Dividend income Investors find it hard to remain focused one hundred percent of the time. This can be especially true when you see the value of your portfolio dropping like a rock.
This past couple of weeks have been especially trying for me as I am heavily weighted in REITs and other stocks that for what ever reason have been in steady declines. Our first instinct as human beings is the “Flee or Flight” response and perhaps from my own observation this tendency is a self preservation technique for most species. Given an opportunity I believe most of us as well as most animals choose to Flee when confronted with danger. And this response makes a lot of sense when you stop and think about it. Fighting should be the last choice because of a great number of reasons not the least of which we might lose our life in the process. As Investors though, this is most likely the wrong choice to make. We should usually decide to stand our ground and “fight”.
If you stop to think things out you can begin to focus on the right decisions even in the majority of the most trying times. Ask yourself just a few simple questions.
- Why did I invest in this stock?
- Has anything changed that would have persuaded me not to invest had I known prior to purchasing the stock?
- Have I lost faith in the company and its fundamentals?
- Will it still provide me with the income I expected?
- Is it just this stock declining or the whole sector that is pulling back?
Why would I sell a stock just because some investors have decided that this sector might not do as well over a short period of time? Investors in general tend to panic and over-react to most situations. Other investors have different objectives than you do. If you are a Dividend Income Investor your objective is to generate high income. IF the other investor is a trader they make money by trading in and out of stocks to maximize their profits and timing is very important for them. If you have a stock that is generating the income you desire and the fundamentals are still sound and the outlook for continuing that income then why would you want to sell?
When Stocks are on Sale – Go Shopping !
If you stop and think about it this is exactly the time you should be making stock purchases – not selling stocks. Why is it that when a stock drops in price the majority of investors run for the exits and sell their share? If you were at a regular store shopping for items you need would you turn and run out of the store because the store announce those products were now on sale for 5, 10 or 25 percent off? Of course not. buying stocks when others are selling gives you advantages over the others. You are purchasing the stock with a lower cost basis and at a higher yield than normal. Both are great for the long term.
As an example let’s look at the returns of a stock that normally yields 5% and because the stock drops in value you can now purchase it for 6.25%:
We invest $10,000 into the 5% yield of XYZ. The shares are valued at $50 and pays a dividend of 2.50 per share.
$10,000 would buy 200 shares and would provide you with $500 per year in income.
Now the same XYZ stock drops down to $40 per share and is now yielding 6.25%
$10,000 would purchase 250 shares and would provide you with $625 per year in income !
So the motto oft his story ? Stay Focused and keep your sight on what your true objectives are. it is easy to get caught up in the hype and the panic of others but if you just stay calm, take a deep breath and make the “Logical” choice as a Dividend Income Investor you will be rewarded for years to come !
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