I’m falling in love with dividend shares!

This writer is a gold digger when it comes to owning dividend shares! But he wants to get to know them before committing. Here’s why.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

White ladder leaning on red wall with cut out heart shape.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

A wide variety of things can be the object of affection for different people. One of the things I have a growing passion for is owning dividend shares. The prospect of extra income, thanks to investing money in beautiful blue-chip shares, warms my heart.

But, as with true love, the course of investing never did run smoothly. Here are a few investment lessons learned as I deepened my relationship with dividend shares.

Looks aren’t everything

Some shares have a very striking look to them. The dividend yield of 16% at housebuilder Persimmon (LSE: PSN) certainly catches my eye.

But shares might not always be what they seem at first glance. Yield is often calculated using historical data. That does not tell me what I could expect in future if I bought the shares today. It just tells me what other people were paid in the past. But I am not interested in the exes so much as what comes next!

Persimmon has announced a new dividend policy which, for the short term at least, means its 16% yield is likely to be a thing of the past. Such information is publicly available for free online, as listed companies report detailed financial information and accounts to the stock exchange.

As an investor, rather than being swayed too much by first appearances, I really need to get to know what lies beneath a share’s initial look.

Considering a future together

In the case of Persimmon, I think what lies beneath a reduced yield is in fact a fairly attractive business. The business has a solid heart, with its proven business model, high profit margins and strong balance sheet.

For now, there is a risk that falling house prices could hurt profits at Persimmon. So I am waiting to see what happens to the housing market before considering whether to make a move on these dividend shares.

But rather than just focus on the short-term financial prospects of Persimmon, I am looking to what I think is the underlying character of the company. Does it seem reliable? Does it know what it wants, in the form of having a clear strategic focus? Do I see a promising future?

For me as an investor, a company’s short-term financial position is worth considering. But so too are its future prospects.

Let’s stick together

If I do decide to invest in Persimmon at some point, it will probably be much more than a fling. As a long-term investor, I like to buy and hold shares for years, or even decades.

That is because I do not just scoop up dividend shares for a quick payout. Instead, I see myself as purchasing a small stake in a business I hope will prosper for a long time to come. If it does so and distributes its excess cash with shareholders in the form of dividends, that could provide some lucrative extra income for me far into the future.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »