Dividend investing can be an extremely powerful method in the stock market which can help you generate a consistent monthly income from the stock market, but many people who invest for an income make these large mistakes.
The first mistake new income investors make is simply not checking the fundamentals of the company.
It can be extremely alluring to go find a list of dividend paying stocks and buy every single stock on that list. But sometimes that turns against you. Many companies will increase their dividends in order to get more investors for whatever reason; their intension is not always to benefit the stock holders.
Some of these companies will only increase the amount they pay out to help save the company from declaring bankruptcy by getting a large amount of new investors. This means that a lot of dividend stocks might actually be poor companies trying to save themselves from going under.
It really isn’t going to do you any good if you buy a stock that offers an 10% or 15% dividend and it goes bankrupt within the next 6 months. So be careful, many times high dividends can be a trap.
You can reduce this risk by taking a look at the individual company. Is it a company which is small and not really making money ? Or is it a company making money growing every day and has little or no debt.
Many times the growth in a large company can even be more profitable than the dividend it pays off. So checking out how strong the underlying company actually is can be well worth it.
The second major mistake income investors tend to make is only relying on dividends. There are a ton of different methods to generate income on a stock.
In fact the most profitable method isn’t even dividends. Covered call writing can be extremely profitable, this is especially true if the stock is staying flat and you can sell calls month after month.
What happens when you sell a call is that you are selling someone else the right to buy the stock from you at a certain price on or before a certain date. In other words they are paying you a premium to have the right to buy it from you.
Why would someone pay you a premium ? Well because if the stock makes a huge move it has the possibility to be worthwhile for them. So if they pay you $4 to buy the stock at $55 and it goes from $51 to 70 they can buy it from you at $55 and sell it at $70.
This does mean that by simply selling calls you are taking a risk that you do miss a big move in the position, but unless you believe the stock will continue to head up then it can be an extremely profitable situation.
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