The Motley Fool

3 danger signs to help you avoid losing money

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.

While finding the right shares in which to invest is of great importance to investors, avoiding the stocks that can lose you money will also boost portfolio performance.

Certainly, it is always easy to see why a company’s share price declined after the event. And while predicting ‘losing’ shares is not an exact science, there are a number of danger signs which can suggest that total returns may be negative in the long run.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

High debt

While the last decade has seen interest rates generally fall across much of the developed world, a new era of tighter monetary policy is now taking shape. Already, the US has increased interest rates and the ECB is set to tighten its monetary policy stance in the Eurozone next year.

This could make life much more challenging for companies which have high levels of debt. In recent years, a number of stocks with balance sheets that are highly leveraged have essentially been propped up by a low cost of borrowing. This has meant that instead of being punished for their over exuberance prior to the financial crisis, they have been given a lifeline that has kept them in profit.

Now, though, the situation is changing and highly-indebted companies could see their profits squeezed by increased debt-servicing costs. As such, it may be prudent for investors to hold stocks which have low debt levels and ample headroom when making their interest payments.

Enthusiastic acquirers

The period of low interest rates in the last decade has also made it cheaper to buy other companies. This has led to a significant number of acquisitions, which in some cases have been somewhat questionable.

Although it can take time for synergies attached to a deal to be delivered, under-performing acquisitions are a danger sign for investors. They show that a company may have run out of ideas in terms of how to generate organic growth. They may also provide evidence that there is a lack of growth potential within the industry as a whole. Or, they may indicate that company management is more interested in company size rather than profitability and efficiency. Whatever the reason, companies that have a poor track record of acquisitions should be avoided.

Dividend cover

Another potential danger sign for investors are companies that lack sufficient headroom when paying their dividends. In some cases, a low dividend coverage ratio is acceptable if the company in question operates in a stable industry such as utilities or tobacco. However, in recent years there has been a trend towards paying out rapidly-rising dividends in a range of industries, as the loose monetary policies pursued by Central Banks has caused confidence among company management to increase.

The result is that some companies may be required to slash dividends by a significant amount if the economic outlook deteriorates in future. As such, while a high yield may be attractive, a lower and more affordable dividend may prove to be more appealing in the long run.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.