Investors often ask ‘What are the greatest risks associated with dividend investing?’. Well the thing about a company is, it doesn’t have to pay dividends. And the risk associated with investing in a company for the dividends is, it has a bad year, or its business goes south, sideways, and it cuts its dividends.
If you think about investors who were in Telstra, five or six years ago, it basically halved its dividend, I think it actually cut by 48%. You lost 48% of your income and the share price fell as well so not only did you lose income but because Telstra’s earnings were impaired you also lost out the capital value of the share price.
One way that you can get around this company risk is to have a diversified portfolio of shares. Don’t just rely on one company, I mean BHP is paying great dividends now, but if iron ore prices go south it’ll cut its dividends too, so diversification is one of the ways you can reduce that risk.
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