I did it again. I lost $2,000, a whole 50% of an investment, in just a month. The stock was International Paper (NYSE:IP). As usual, I did some things right and some things wrong with this investment. (Like most longtime investors, I'm no stranger to mistakes.) Maybe I can help you not make some of the same blunders. Here are some things I did wrong:
For starters, I chased a fat dividend. When I bought it, the stock was trading for around $8 per share, and paying $1 per share in dividends. That's a 12.5% dividend yield -- mighty tempting, no? I thought so, too. Well, I should have taken its sizable debt load into account more, and given more consideration to the possibility of a dividend cut.
The stock plunged in value not long after I bought it, giving me my first big disappointment. Next, the company cut its dividend by ... 90%. Sigh. I sold when the stock was around $4 per share. And now, it's almost back up to where I bought it in the first place.
Look for the best
I think my biggest error was failing to focus on my best investing ideas -- the stocks that seem to have the most potential. International Paper was partly a gamble for me, and gambling with so many hard-earned dollars isn't too smart. It's often tempting for us to keep adding more companies to our holdings, wanting to own this, and that, and that, too. When we're about to buy something, it's good to ask ourselves whether the money might be more effectively invested in additional shares of what we already own.
Even selling out at $4 might have been a mistake -- and not just because the stock is back up. I'm not silly enough to expect myself to be able to time things perfectly -- no one can, at least not consistently. The stock may well perform admirably in the years to come, and I may regret having sold. But I take comfort in having sold because I owned the shares for the wrong reasons, and because I'd rather keep my dollars where I have the most confidence.
If I had really wanted to add a new company to my holdings, one that offered significant dividends, I'd have been better off finding one via careful screening. Here are some companies from our Motley Fool CAPS community, for example, that sport dividend yields above 3% and received a top five-star rating from investors:
|
Company |
Recent Dividend Yield |
|---|---|
|
Altria (NYSE:MO) |
7.6% |
|
PepsiCo (NYSE:PEP) |
3.4% |
|
ConocoPhillips (NYSE:COP) |
4.9% |
|
Johnson & Johnson (NYSE:JNJ) |
3.6% |
|
Norfolk Southern (NYSE:NSC) |
4.3% |
|
Novartis (NYSE:NVS) |
4.5% |
Source: Motley Fool CAPS.
Now that's a more promising way to go about finding winners -- better than just letting your head get turned by a hefty dividend yield.
Knowing better
The kicker in this story is that on all counts, I knew better. I've written often about such topics, urging people to optimize dividends, to be wary of steep debt, and not to sell too early. You've probably learned a lot of lessons you don't heed often enough, right? Well, stop doing that!
Fortunately, I'm not pulling my hair out over this. These things happen when you invest -- the greatest possible rewards don't come without some risk. I've made a lot of money on some great stocks and will continue to do so. And I'll occasionally lose money, too. With any luck, I'll keep learning from my mistakes and will make fewer of them -- as all good investors do.
