Misconception #1: Dividends Are Good When Money Market Rates Are Low
There is no evidence that money market yields signal the right time to invest in dividend-focused mutual funds. In an October 22, 2009 article, financial guru Suze Orman recommended the following dividend funds: iShares Dow Jones Select Dividend Index (NYSE:DVY), WisdomTree Total Dividend (NYSE:DTD) & Vanguard High Dividend Yield Index (NYSE:VYM). The 12-month performance after Orman's recommendation was DVY (+7.86%), DTD (+21.91%), VYM (+17.72%). These returns seem pretty good - until you realize you could have just held on to the S&P 500, which was up +26.36% over the same period.
Misconception #2: Dividend Companies Are More Stable
It is generally believed that companies that raise their dividends over a long period have solid market positions and strong cash flow. As a result, the stocks' total return is likely to outpace other stocks. It's easy to pick a "solid" stock in retrospect but it is impossible to pick a company today that will meet this statement moving forward. Sure, if you had purchased Coke in 1962…but what about today? In 2007 we would have said that General Electric (NYSE:GE) and AIG (NYSE:AIG) were stable and well-managed dividend companies. Would we say the same in 2009? What about in the future?
Misconception #3: You Can Count On Dividends
Many people believe that it's rare for a solid company to suddenly reduce or rescind its dividend payment. "Solid" companies like Bank of America (NYSE:BAC), General Motors, Pfizer (NYSE:PFE) and GE, have either suspended or cut their dividends. Unfortunately, it is a lot easier to identify companies that had a solid record than to identify companies that will have a solid record going forward. It is impossible to predict which "solid" companies today are going to be on shaky ground tomorrow.
Misconception #4: Dividends Provide Upisde Potential/Downside Protection
Misconception #5: Tax Treatment Make Dividends More Attractive
Misconception #6: Dividends Are Ideal For Retirees And Conservative Investors
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