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Tata Capital > Blog > Wealth Services > Busting 5 Biggest Myths About Dividend Investing

Wealth Services

Busting 5 Biggest Myths About Dividend Investing

Busting 5 Biggest Myths About Dividend Investing

For individuals who are always on the lookout for low-risk, high-return investment options, dividend investment often stands out as a reliable choice. Dividend investing involves investing in stocks or mutual funds that pay dividends to their investors.

Dividend investing is a form of passive investing popular among investors because it helps generate a regular income stream, carrying low risk, and offers high growth potential when re-invested.

However, as with any investment strategy, it has its fair share of myths and misconceptions. Let's dive into five of the biggest myths about dividend investing and separate fact from fiction.

1. Myth: Only pick high-yield stocks

The point of dividend investing is to receive attractive returns. As a result, it can be tempting to chase stocks with the highest dividend yields to maximize your earnings.

However, focusing only on high-yield stocks carries the risk of having a very concentrated portfolio. Additionally, since the dividend is paid from the company's cash flow, a higher dividend payout will lower its cash reserve, and the company might have to forego future investment opportunities for growth.

Instead of focusing solely on yield, investors should consider a company's dividend history, payout ratio, and overall financial health.

2. Myth: Dividend investing is always safe and guaranteed

While companies strive to maintain or increase their dividend payments over time, there is no guarantee that they will be paid. Dividends are a sign of healthy company financials but they do not guarantee consistent performance in the future. Economic downturns, changes in industry conditions, or company-specific challenges can impact a company's ability to pay dividends.

Given the market volatility, you must consider the hidden risks of dividend investing before moving forward.

3. Myth: Dividend investing is tax-efficient

Dividend payouts are taxed at tax rate applicable to the assessee

Not to mention, as per the Finance Act 2020, the dividend paid by companies and mutual funds above Rs. 5000 carries TDS at 10% if the investor provides PAN details and at 20% without the PAN details.

Further, dividend stocks can generate lower returns than non-dividend stocks. This means that the net income created by these stocks is often lower than that of non-dividend stocks, reducing their tax efficiency.

4. Myth: Dividend investing is value investing

Value investing is a strategy where investors choose stocks trading at a lower price than their intrinsic value. The misconception that dividend investing is the same as value investing arises from the fact that value investors look for low-valuation stocks while dividend investors seek stocks that are trading at a low price.

While these strategies seem similar, they are not. Value investing is concerned with capital gains, and dividend investing primarily interests regular dividend income.

While investing in low-value stocks, value investors consider factors like risks, growth opportunities, and future cash flows, along with low price-to-growth and price-to-earnings ratios. Since they aim to benefit from any capital gain in the future, they look for stocks with limited dividend capacity.

On the other hand, dividend investors focus more on low-value stocks of companies with stable cash flows in the long run.

5. Myth: Dividend investing eliminates the need for diversification

Dividend investing is a good place to start for new investors looking for opportunities to invest their funds at a low risk and generate a regular income stream. However, focusing solely on dividend stocks means you miss out on other high-return, non-dividend investments.

As a result, you might lose the opportunity to diversify your portfolio for higher growth.

To Wrap Up

Dividend investing offers a compelling opportunity for investors seeking regular income at a low risk. However, it is important to be mindful of the risks and understand the myths surrounding dividend investing to make smart investment decisions.

Ready to begin your investment journey? Connect with Tata Capital Wealth and its team of financial experts to pick out the best investment avenues that align with your risk and financial goals. Visit the website today.

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