Investors who rely upon income in retirement or for other needs have gravitated to dividend shares amid continuing low interest. GE’s move highlights how overexposure to dividend stocks and shares can cause real problems, according to Ghodsi.
What happened to lender stocks during the economical crisis is one of these, he said, when businesses that once paid steady dividends lower them substantially.
“There are plenty of folks that suffered significant discomfort and weren’t in a position to get over it,” Ghodsi said.
Investors need to look out for getting too emotionally attached to an individual company, say when they inherit the share from a parent who also worked there for 30 years, Ghodsi said.
They also have to keep their time horizon at heart. A retiree who has plenty of cash flow from a pension and Community Security could be OK holding onto the stock. Someone else who depends on that income could be overexposed, regarding to Ghodsi.
“It is critical that they know specifically what they personal,” Ghodsi said. “Today it’s GE, however in a month or half a year it’ll be another company.”
Individuals looking to invest in dividend shares should evaluate a few things, according to J.J. Kinahan, chief market strategist at TD Ameritrade.
First, consider the stock price.
“You tend not to obtain any dividend cuts when the purchase price is steady,” Kinahan said.
Second, for businesses that don’t have an extended record of paying dividends, turn to see where else the company is putting its money. Signs of a solid business model include investing in services and research and expansion, Kinahan said.
“Nothing is safe if you don’t regularly evaluate it,” Kinahan said. “Prepare yourself and execute a little homework.”
While some financial pros see opportunity in the GE news, others state it’s another reason to be cautious with large dividend-paying companies.
“I suspect this can be the first time I’ve been positive on GE since the 1990s,” said Paul Schatz, president of investment control organization Heritage Capital in Woodbridge, Connecticut.
“I think persons are going to mistake GE’s idiosyncratic problems with problems with large-cap dividends,” Schatz said. “There are plenty of really good reports out there in the dividend space that persons should not ignore.”
Stephen Aniston, president and chief expenditure officer of expenditure advisory firm Black Peak Capital in Fairfield, Connecticut, said he sees other examples of dividend-paying companies which may have had declining income flows, earnings and sales, such as Coca-Cola and Caterpillar.
“They experienced steady declines in revenue and cash flows over the last couple of years. They trade at increasingly bigger multiples,” Aniston said. “The basics of their businesses usually do not support raising the dividend.”
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