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Buy a cheap dividend stock now? 3 things I avoid!

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Buying cheap dividend stocks is part of an income investor’s track record. Everyone can decide for themselves what is cheap and what is attractive. Your own circumstances may also be relevant. Ultimately, though, it’s important not to lose sight of the business.

Let’s turn the tables today: If I’m looking to buy stocks with cheap dividends, there are three things I avoid doing. And I think all investors are generally well advised here.

Buy Cheap Dividend Stocks: Avoid Cyclicality

Even for cheap dividend stocks, cyclicality and particularly cyclical business models can be poison. When net results go up and down, it’s not just stock prices that follow. No, but concerns about dividend stability also come up time and again.

Therefore, cyclical business models can be poison for the stability of even the most favorable dividend. This does not have to apply to all actions. However, some cyclical stocks continue to pay consistently. But the concerns are translating into mixed returns overall. There is a risk of shortening with a longer cycle.

A defensive class and less sensitivity to economic fluctuations is usually a better base. Anyway, that’s what I look for when I buy cheap dividend stocks.

Life to the limit!

Buy cheap dividend stocks with a high dividend yield? Like I said, it doesn’t have to be wrong. However, when in doubt, investors should always consider how sustainable the dividend is. Not just in a single year and especially not in hindsight. Ideally also with regard to the future and the coming years.

If the distribution relationship is already close today, I prefer to avoid the respective participation. Especially when other things come into play. Hardly any growth, cyclical business models, or other potential burdens. Here too there are exceptions, for example, real estate investment trusts with high payout ratios by definition. In essence, though, the cap and additional potential is something for forward-thinking dividend seekers to keep in mind.

Buy Cheap Dividend Stocks: No Growth? No, thanks

Finally, I avoid cheap dividend stocks unless they have growth potential. Stability can be attractive, to be sure. Sometimes a high payout is also appropriate, for example with a late retirement. However, a lack of growth often means that inflation throws a monkey wrench into the work of their overall returns.

At least there should be the prospect of moderate growth. Or the possibility that a company behind the bag can grow again. If that’s the case, you can risk an investment. Otherwise, there are definitely better alternatives.

The article Buy stocks with cheap dividends now? 3 things I avoid! first appeared in The Motley Fool Germany.

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Motley Fool Germany 2022

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