13 Dividend Stock Mistakes That Could Cost Retirees Thousands

Dividend investing seems straightforward. You buy stocks and collect checks. For retirees, it beats trying to time market swings. But small mistakes can add up fast. Moves that seem smart, such as chasing high yields or sticking with one industry, may be costing you thousands of dollars each year.

If you're looking to start investing for steady income, understanding the pitfalls is just as important as picking the right stocks. While experts caution against relying solely on dividends for all of your retirement income, they are an essential component of a hybrid approach. Here are 13 traps to avoid to make your dividend income last and grow.

If you want a steady retirement income, your dividend portfolio needs to withstand fluctuations across different economies. Banks and manufacturers often cut dividends during downturns, but utilities and grocery stores typically continue to pay because people still require electricity and food.

If you depend on dividend income for living expenses, balance recession-proof sectors with cyclical ones to keep income flowing when the economy stumbles.

Utilities and real estate investment trusts (REITs) pay nice dividends, but you don't want to rely too heavily on them. Both sectors get crushed when interest rates rise, so consider better bond yields instead.

Spread your money across industries, from health care and consumer companies to tech and banks. That way, you're buffered when one area tanks.

High yields can be traps. A stock with a 6% dividend that drops 10% yields a 4% loss. A stock with a 3% dividend that grows 8% delivers an 11% gain.

For example, say you have $10,000 to invest. The high-yield stock drops to $9,600. The growing dividend stock becomes worth $11,100. That's a $1,500 difference.

It's okay to sacrifice a little return for long-term, steady growth.

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In dividend stocks, as in life, when something seems too good to be true, it probably is. Don't fall for an outstanding yield in a shrinking industry. Struggling companies may dangle attractive yields as they crumble. However, returns are doomed from the start.

Focus on sectors with solid prospects and steady growth.

Don't buy a stock because it was once great or has a history of paying good dividends. The marketplace constantly changes, and yesterday's success isn't guaranteed tomorrow. Are its financials still solid? How does it rate next to its competitors? Is its business model up to date?

Always verify a company's current financial status before making a decision.

How are a company's earnings paid out in dividends? If it's 80% or more of profits, there's no wiggle room when business gets tough. The moment earnings drop, dividends get slashed, and your income vanishes.

Choose companies paying out less than 70% of their profits.

Instead of paying dividends in cash, stock dividends give you more shares of stock. While this may sound good, more shares don't always mean more value. You may see your price per share drop with each payout. You own the same percentage of the company, but it's split into smaller pieces.

For retirement income, focus on companies that pay genuine cash dividends.

You see an attractive dividend from a foreign company. Should you take it? You may be adding a layer of uncertainty between you and your income. Currencies fluctuate constantly, and shifts in the exchange rate can turn your attractive return into a trickle of income or worse. You might also be subject to foreign taxes.

Stick to U.S. dividend stocks or currency-hedged international funds.

A 1% fee may not seem like much, but it adds up fast. Take $100,000 invested for 20 years at 7% returns: a 1% fee fund leaves you with $320,000, while a 0.06% index fund grows to $380,000. That's $60,000 lost to fees.

Compare expense ratios before investing and choose low-cost dividend exchange-traded funds (ETFs) wherever possible.

If you're not careful about where you keep dividend stocks, you might pay more taxes than you need to. Consider keeping high-yielding stocks and REITs in tax-advantaged accounts, such as an IRA, Roth IRA, or 401(k). On the other hand, your growth-focused dividend stocks are fine in your standard brokerage account.

This strategy alone can save you thousands in taxes.

As an investor, you understand the power of compounding, so why would you take your dividend payments before you need them? Reinvesting grows your money faster.

A $1,000 annual dividend, reinvested for 10 years at 7% annual returns, becomes $13,800. Taking it as cash gives you just $10,000.

Set up automatic reinvestment until you need the cash.

The market is smart. If you buy a stock thinking you're timing the market to get "free money," your stock price will drop by close to the dividend amount on the ex-dividend date.

For example, a $50 stock paying $2 becomes a $48 stock plus $2 cash, which means no gain. Plus, you'll pay taxes on that income. Focus on company fundamentals instead of dividend timing.

Your dividends were just slashed. Should you sell at rock-bottom prices? Before making a decision, investigate the reasons behind the cuts. Disney and Ford suspended their dividends during the pandemic, for instance, then reinstated them.

Patient investors who held on made money twice, from dividend recovery and rising stock prices.

For a lasting income, good dividend investing requires homework. Spread your money around, be smart with taxes, and avoid payouts that look too good to be true.

Despite its pitfalls, dividend investing remains a smart money move for retirees. Regular payments offer a psychological edge that helps you stay calm and avoid panic-selling during market volatility. Get it right, and you'll sleep better knowing steady checks are coming regardless of what the market does.