10 Dividend Investing Mistakes Malaysian Investors Always Make: Avoid the "Dividend Trap" & Major Losses
•By Neo Capitalist
Artikel ini juga tersedia dalam Bahasa Melayu
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Every year, many newbies jump into the stock market after being swayed by the phrase "sit back and collect money". It sounds wonderful, but the reality is, dividend investing is not simply about buying and waiting for money to roll in. Without proper knowledge, the intention to make profits can quickly turn into massive losses until your account is "blown".
If you are a seasoned investor or just getting started, let us examine 10 common mistakes in dividend investing that you should avoid so your capital does not go up in smoke.
What Is Dividend Investing? Read More Here [A Friendly Guide to Dividend Stock Investing: Your Journey Towards Financial Freedom]
The most classic mistake is buying stocks because you saw a "hot tip" in a Facebook or Telegram group. Remember, in the world of dividend investing, your money is your own responsibility. Do not fall victim to "herd mentality". If a friend says stock A is good, do your research first. Do not be the last person to buy before the price plummets.
Newbies think stock investing is like playing a slot machine. In reality, the dividends a company pays come from its net profits. If the company is making losses or its debts are skyrocketing, how can it possibly pay dividends consistently? Before making any dividend investment, make sure you understand the company's business model first.
Read Our Articles on Fundamental Analysis:
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This is the most dangerous strategy: buying today because tomorrow is the Ex-Date, planning to sell the day after. The problem is, after the Ex-Date, the stock price typically drops (adjustment) in line with the dividend value given, and sometimes it falls even further! In the end, you receive RM100 in dividends, but your capital shrinks by RM200. Not worth it, is it?
Who does not love a high yield? But in dividend investing, an excessively high yield (for example, exceeding 10%) is usually a "red flag". Typically, the yield appears high because the company's share price has been plummeting due to internal problems or a declining industry. Do not end up "catching a falling knife".
A company that pays large dividends this year does not necessarily have the capacity to maintain the same rate next year. You need to examine the Dividend Payout Ratio (DPR). If a company pays out dividends exceeding its profits, that is a sign its business is unsustainable in the long term.
The Buy & Hold strategy is indeed excellent for dividend investing, but do not let it become Buy & Forget. The business world changes rapidly. A company that was dominant 10 years ago may already be obsolete today (like the cases of Nokia or Kodak). You need to continuously monitor the company's performance at least every quarter (quarterly report).
There is a difference between a stock that is undervalued (cheap because the market has overlooked it) and a stock that is simply "unwanted". Do not just look at a low Price-to-Earnings (PE) Ratio and immediately want to buy. Investigate why the price is low. If the fundamentals are in ruins, that "cheap" price is actually a trap.
"I cannot bear to sell it, this was the first stock I ever bought." Sentimental feelings have no place in the stock market. If the company's fundamentals have changed and the business is increasingly losing money, you must have the courage to cut loss. Holding on to a stock that keeps declining only wastes your opportunity cost to invest in other, higher-quality counters.
Many Malaysian investors are beginning to explore the US market. However, do not forget about the Withholding Tax of 30% on dividends for foreign investors. If a US company pays RM100 in dividends, you only receive RM70 net. In dividend investing locally (Bursa Malaysia), most dividends are tax exempt, so do your calculations properly before investing overseas.
The news you read on financial portals is often "late news". That information has usually already been priced-in (reflected in the stock price). Use news only as supplementary reference, not as the ultimate determinant of your decisions. Your own analysis remains the best approach.
To all our fellow newbies, remember that successful dividend investing is a marathon, not a 100-metre sprint. Focus on quality companies with strong cash flow that can pay dividends consistently.
Do not rush to chase yield figures that seem too good to be true. It is better to earn a little but consistently, rather than earning big once only to have your capital wiped out later.
The most common mistake is buying stocks solely based on tips from social media without conducting your own fundamental research. Investors also frequently fall into the trap of chasing high dividend yields without checking the company's financial stability.
Not necessarily. An excessively high yield can be a sign that the company is in trouble and its share price is falling. Investors need to verify whether the company can maintain dividend payments consistently.
Check the company's cash flow, its track record of consistent dividend payments, a reasonable payout ratio, and the strength of its business model. Companies that can pay dividends continuously typically have stable earnings.
Most dividends on Bursa Malaysia are tax exempt for local investors. However, US stock dividends are subject to a 30% Withholding Tax for foreign investors, including Malaysian investors.
Avoiding mistakes in dividend investing is the key to building a portfolio that delivers consistent returns.
Open your CDS account via Register for Mplus CDS Account to start building your dividend portfolio on Bursa Malaysia.
Just starting to learn about stocks? Download the Free Stock Basics Ebook to understand the fundamentals of stock investing before you begin.
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