Dividend investing has become one of the most popular investment strategies for millions of investors, as it gives you the potential both to get substantial income from your portfolio and to reap the long-term growth that stocks offer. But many investors still don't have all the facts about dividend investing.
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, discusses three things many people don't know about dividend investing. Dan opens by noting that it's important to understand that dividends don't always track a stock's earnings potential. For instance, real estate investment trust Annaly Capital (NYSE:NLY) and master limited partnership Kinder Morgan Energy Partners (UNKNOWN:KMP.DL) are both required to distribute nearly all of their income as dividend distributions to keep their favorable tax status. By contrast, ConocoPhillips (NYSE:COP) and Freeport-McMoRan Copper & Gold (NYSE:FCX) also pay relatively healthy dividends, but they pay only a small fraction of their overall earnings to investors.
The second thing Dan discusses is that in many cases, looking for dividend growth rather than high current yields can pay off in the long run. High-yield stocks often end up cutting their dividends, causing loss of income and often a subsequent share-price drop. Finally, Dan concludes by discussing the behavior of stocks that declare special distributions and why you should think twice about buying a stock that has just announced a special dividend.