Dividend-paying stocks can be a great choice for the right investor. Receiving that quarterly dividend cheque is satisfying. However, dividend-paying stocks aren’t always the best option. There are several circumstances in which investing in stocks that pay a dividend is a mistake. It’s possible you’re one of the investors that shouldn’t be looking at dividend-paying stocks now.

What is a Dividend?

A dividend is a payment from a company to a shareholder. Profits can be re-invested in the business for future growth or paid to shareholders in the form of dividends. Companies that pay dividends usually do some of both.

There are two forms of dividends: Cash and Stocks. Most investors are familiar with cash dividends. Some companies prefer to issue additional shares of stock in lieu of writing a cheque.

A company can also utilize a dividend reinvestment plan. The dividends are used to purchase additional shares of stock.

Investing in stocks that pay dividends can be a powerful strategy, especially if you’re investing for the distant future. But dividend-paying stocks aren’t always the best choice.

When Are Dividend-Paying Stocks a Mistake?

There are times to reconsider the purchase of dividend-paying stocks:

1. The company is struggling. The dividend yield of a particular company can be very attractive if the price of the stock drops significantly. However, consider why the price has dropped.
   • If the stock is a great deal, then go ahead and buy it. If the price has dropped because the company is struggling, beware. The dividend is likely to decrease in the future anyway.
2. When the stock price is too high to justify the dividend payment. A $0.20 quarterly dividend on a $9 stock is a good deal. The same dividend on a $200 stock is not. Look at how much that dividend is going to cost you.
   • When comparing different companies, look at the dividend yield. The yield is the annual dividend divided by the stock price.
3. It’s the wrong type of company.The best dividend-paying companies are mature and lack room to grow. Paying a dividend to investors might be the best way for this type of company to spend its excess profits. However, be cautious of a young company in a growing field that’s offering a dividend. That money could be better spent on growth.
   • If a growth company is paying a dividend, find out why. The management team might be making poor decisions.
4. The company is out of cash. Companies that are running out of money have two choices when it comes to paying dividends: Cut the dividend or borrow money to make the dividend payments. Both actions are likely to hurt the stock price.
   • Stock prices respond quickly to changes in dividend payouts. Be especially careful if the company is running low on cash.
5. The company’s record of paying a dividend is spotty. Some companies pay their dividends as reliably as the sun rises each morning. Other companies are less reliable. Examine the dividend record of the company in question. In an ideal world, the dividend payments have been increasing on a regular basis.
   • How well has the company met its earnings projections in the past? A company that consistently falls short of expectations is a risky bet.
6. Interest rates are too high. When interest rates are high, banks can pay better rates than dividend-paying stocks. Keep an eye on how much banks are paying before you purchase any stock shares. Your cash might do better in the bank. Dividend-paying stocks are especially attractive when interest rates are low.
7. When growth is more important to you than income. Dividends are great when reliable income is important to you. However, if you’re a 24-year-old investor with your eye on retirement at age 60, growth is likely to be more relevant. Consider your goals before purchasing a stock that pays dividends.
8. When the tax status of your account makes dividends less attractive. Dividends are taxed at the same rate as capital gains, which is lower than the ordinary income tax rate for most investors.
   • A traditional IRA account requires that normal income tax rates be paid on withdrawals. This is the worst case.
   • Withdrawals from a Roth IRA are not taxed, provided the requirements are met. This is the best case.
   • A typical brokerage account will result in capital gains taxes on your profits. This option is the middle ground for most investors.
   • Ensure that you’re considering the tax ramifications before you invest.

Investing in stocks that pay dividends is about more than just looking at the yield and creating a buy order. And dividend-paying stocks aren’t always the best choice for all investors. Consider the strength of the company, your tax situation, company history, and your investment strategy

Just because a particular company pays a dividend doesn’t mean it’s a good investment. Perform the same basic research you would on any other stock.

Additional Tips for Investing in Stocks That Pay Dividends

1. Look at more than just the yield when purchasing stocks that pay a dividend. The dividend yield is the dividend divided by the stock price. This allows for an easy comparison between stocks of different prices.
   • However, the yield is only part of the picture. Consider the underlying financial health of the company. Some stocks have a great yield because the stock price is crashing and the company hasn’t lowered the dividend payment yet.
2. Avoid purchasing a stock just to collect the dividend. It’s common for investors to attempt to purchase a stock before the dividend is paid and then immediately dump the stock after receiving the dividend payment. However, the stock price reflects the dividend payment. Study a few stocks that pay dividends. Look at the drop in price after the dividend is paid.
   • You’ll find that the stock price falls by an amount very close to the value of the dividend payment.
   • Remember that stock prices include all available public information. The dividend payout and date are both readily available to the general public.

Investors love receiving dividend payments. There’s something satisfying about getting paid versus holding a stock for 10+ years without putting any money into your pocket.

For certain situations, focusing on stocks that pay a dividend can be an excellent strategy. However, there are many times when dividend-paying stocks don’t make a lot of sense.

We are living in an era where there are a lot of changes happening especially as it relates to technology. To take advantage of these opportunities we have to learn how to invest in asymmetrical projects. Asymmetrical projects are basically projects that bring exponential returns.

For every input, you put in whether that be time, money, or other resources you get 100X in returns. A good model of where you can find examples of asymmetrical returns is from tech companies.

Within the span of three years, a tech startup can scale up from 1 to 100 million users by utilizing network effects and other underlying models.

They invest in asymmetrical marketing campaigns. Some of them might seem spammy or a bit over the top but at the end of the day, they got the job done. Another great example of where you can find areas of asymmetrical examples is to look at new technologies.

Examples are cryptocurrencies, automation, etc. The returns of these technologies have been exponential, sometimes 10000X the rate of what you put in.

Asymmetrical projects are not just exclusive to tech companies or even technologies in general. I believe that the average layman can utilize asymmetric returns if he or she knows how to think this way.

It doesn’t have to be quantified from a financial perspective either. You can utilize this way of thinking to study, network, health, etc.

Linear Thinking

Before one can think about utilizing asymmetric returns, we have to rid ourselves of linear thinking. Thinking linearly is still necessary for everyday life, it’s our default mode of thinking.

For example, whenever we think about our sales goals or savings, we think about a steady line growing linearly on a graph. It’s pretty stable and average, nothing major is happening. Just a nice clean-cut line. We think that for 1 unit of increase in input we get an equal output.

If we add more employees into our company, we might see an average increase in productivity. This model of the world is still important but isn’t alone necessary if we want to grow beyond a certain threshold.

You will be outcompeted by persons who are thinking on a whole different wavelength. Your returns in a year would be an average month for them. For example, from a software programming perspective, you have really good software engineers who can do what an entire team does.

Asymmetrical Thinking

When you are thinking asymmetrically, you are thinking about how can you maximize the returns of your input. For one unit of input, how can you get 100X output? Let’s dive into awareness for a little bit here.

Everyone has a biological time daily when they are at their most productive. It only lasts for a couple of hours, but when it occurs you can get most of your daily productive tasks done.

During this period, you can utilize this time to do your most important work and leave the menial and repetitive work for hours outside that scope.

For some persons, this could be early mornings, late nights, and some other stretch of period throughout the day. It all depends on the individual. Persons that are productive utilize these 3-4 hours to win. Often times that’s all they need in order to have a good day.

On the other side of the fence, you have some persons who have to work long hours sometimes 3X longer than the productive ones to get the same returns.

Asymmetrical Thinking Drives Asymmetrical Ideas

Once you start to think asymmetrically or about exponential returns, it’s like a new world of doing things has opened up. You start thinking about scaling up different areas of your life 100X. It’s like having a car that taps out at 100 mph and wants to tune it up to 150mph.

Ideas will also come to you that might seem foreign before but normal now. What you think you can achieve in 10 years can now be achieved in 6 months. I remember I watched an interview with Peter Thiel who is the co-founder of PayPal and billionaire investor.

He talked about that very same concept of compressing time, he looks at what a company could achieve in x number of years and see if it’s possible they can achieve that in months. It’s a crazy idea but it goes right into the concept of Parkinson’s Law. Parkinson’s Law states that “work expands to fill the time available for completion”.

For example, if I set a milestone for a project to be achieved in 200 hours. I will work according to that completion period. It’s as if there is a meter in my brain that will program to work according to that time. Not knowing that probably I could achieve that in less time if I reduced the hours.

That’s how most of us think. We all have worked on projects that took us hours because we already had it in mind that it’s going to take hours to complete. Our bodies then automatically act like it’s going to take hours because our minds were already fixated on that.

That’s why in the startup world, we see companies gaining traction exponentially because the internal work culture thinks in an exponential way. It’s deeply competitive and they have competitors sprouting up thus they have to innovate quickly. Even if it means releasing an MVP version then quickly iterate to capture the userbase.

Asymmetrical Systems

Asymmetrical systems stem from asymmetrical thinking. When you think about asymmetrical systems it’s basically the systems that govern everything you do or everything that impacts you.

How can you improve it in such a way that your returns are not linear but exponential?

Could you learn a new language to tap into a new demographic?

Could you automate certain processes so you can scale to millions?

Once you start to think about asymmetrical systems you will see how unproductive certain areas of your life have been throughout the years and you are not even tapping into half your potential yet.

Asymmetrical Opportunities

In the 21^st century, there are asymmetrical opportunities all around us especially if you are within the technology field. What took 100 employees to achieve in 2000 can now take close to zero depending on the market you are in. That’s why it’s important to invest in asymmetrical projects where you can leverage asymmetrical technologies.

This includes web services, automation, robotics, artificial intelligence, cloud technologies, etc. Look at Amazon, for example, their e-commerce business is basically eating the world. Over the years they have made use of robotics in their warehouses to improve efficiency. They also use artificial intelligence systems to improve their recommendation systems that can drive more sales.

The number of asymmetrical technologies underlying Amazon makes large brick-and-mortar stores look like a community mom-and-pop shop. Google is also at the forefront of utilizing asymmetrical technologies. To list all of them would be a daunting task as most are disclosed behind closed doors.

For a typical entrepreneur who wants to capitalize on asymmetrical opportunities, you have to ensure that you are in the right space first where it is necessary. For example, if you have a Shopify store, that could be easily scaled with targeted advertising.

Additionally, you could use virtual assistants to automate customer service and certain forms of marketing on the backend.

Asymmetrical Investing

From an investing perspective, asymmetrical investing is the holy grail. We all would want to put $100 in the slot machine and get $10,000 out. An investment like this is possible but it comes with a caveat.

You cannot make asymmetrical investments your main bread and butter unless you have the stomach of a whale to ride it out.

For example, let’s look at crypto, one of the main drivers behind cryptocurrencies in the hope that we are all going to be rich by investing $100 in an early altcoin. This is not necessarily the case at all, if you don’t have disposable income lying around, I don’t think you should invest in cryptocurrencies heavily because it’s just not the right vehicle.

In a bull market, everyone seems smart because the market is going up and a fool can put in $100 and get $1000 in return and thinks he is Warren Buffet. Not regarding the fact that most of these investment funds hedge their bets so that even if they lose on that bet, they were already investing in derivatives to offset the losses.

Naïve traders or investors will get caught flat-foot because they don’t have the capital to weather out the storms. You have to be realistic and pick the battles you can win with what you currently have.

It would be way easier to create an asymmetrical online business that can scale which can then give you disposable cash to invest in asymmetrical investments. Experimenting is very important when it comes to these types of projects.

Summary

In sum, it’s necessary to invest in asymmetrical projects especially given the plethora of tools available at our fingertips. At the beginning of an asymmetrical project or venture, the returns will seem small and the linear route might seem better.

Once momentum starts and the system turns into a well-oiled machine, it will be hard to stop. Hence why it’s easy to see how a tech company could be worth over 100 billion in less than a decade in this era.