There are numerous myths related to finance and dividend investing. Right from the notion that beating the trend is just impossible to dividends not being helpful with taxes, there are a number of myths that surround the topic. The following is a list of the most common myths related to dividend investing and the actual facts about them: One cannot beat the stock market Beating the stock market may be considered difficult over a long period of time, but it cannot be completely ruled out. The fact is that it is possible to beat the market, though the chances are higher when the cycle is shorter. There are more chances of beating the market over a 10-year period than over a 20-year period. Here are some points to bear in mind if one wants to beat the market:
- Invest in stocks that indicate a dividend yield of more than 0%; only stocks that give a dividend should be preferred.
- Select companies with an advantage of size and scale.
- Year on year earning per share (EPS) growth should be at least 5%.
- If you select companies with a payout ratio of less than 50%, there are high chances that dividend will be high even if the EPS does not grow in the longer run.
- Only invest in companies with a price to earnings growth of >1.
Index investing is free of worry Allocation of capital is very important. One can follow an approach of allocating capital to the industries where businesses are booming and secure, but the valuation is inaccurate. This means that a person has no discretion on the allocation of capital as per sectors, and they do not get a chance to allocate capital in accordance with opportunistic industries. There have been many cases where investors have invested free of worry, but investors are caught in a vicious circle when the market overturns in such cases. Dividend investing does not help with tax saving This might generally be true, but investing in dividends to plan a retirement fund may be an exceptional case. The tax rate in the future becomes substantially lower than the current tax rate in such a case, which certainly helps in the longer run. The idea with dividend investing is to help shares make money over a long period of time, and selling of the shares should usually not be considered. When you keep buying shares over a span of time, the difference in tax rates makes a big impact. Dividend investing takes a lot of time It is often said that one must give in a major part of their time if they are interested in dividend investing, but exactly the opposite is true. One should always keep investing and not continuously check the status of their shares, else there are chances of hurried and exhaustive action being taken, which is not the right approach.
