3 Reasons Why You Should Avoid Dividend Funds

For some investors, the idea of sticking it out with their bonds and enduring what can be years of devalued market prices (assuming rates increase after all and the bonds cannot be held until maturity), the possibility of investing in dividend paying securities has been a convenient alternative.

However, dividend paying securities and dividend funds in particular might not make much sense at this stage in the game. Here are three reasons why many dividend funds might be a bad idea for the balance of the year:

1. Dividend Yields are now low.

Although the end of 2009 still presented ample opportunities for investors to shift out of their bonds and into dividend paying securities, there has been a fair run up in dividend security prices.

This means that while investors might have been able to come close to replacing a good chunk of lost income from bonds back then, today that is no longer true. As for dividend funds, their yields are unattractively low, so investors are doing themselves a disservice if income is their primary objective.

2. Narrow investment choice.

While it is clear that dividend funds are not earning the yields they would have just 12 short months ago, investors who have decided to specifically purchase dividend paying securities are narrowing their investment choice considerably.

This is because most investors who are getting out of bonds and into securities will purchase only the large cap securities they are most comfortable with (in terms of risk). This narrow range limits the income earning potential of the investment as these larger investments typically pay much lower dividend yields.

As well, with dividend funds these large cap investments will perform more like large cap growth funds, so why not simply invest in a growth fund that has better potential because it can invest in non-dividend paying securities?

3. Dividends are a popular option right now

Meaning that people are chasing the popular money. This makes dividends a bit uglier in terms of investment appeal because they are either overpriced or, more likely, they are leaving other asset classes under priced. People looking for true long-term opportunities would be smart to look at other asset classes.

These three reasons outline why dividend paying securities as well as dividend funds might be better if they were ignored as investment alternatives to bonds.

In fact, bonds themselves have continued to perform fairly well; investors who dumped their bonds last year might be disappointed that they have done so, especially if the switch was intended more as a short-term strategy than a long-term investment decision.

Anything I Missed?

There you go guys, take all these points into account when entering the stock market.

And now I’d like to hear from you:

Or maybe you have a question.

Either way, let me know by leaving a comment below right now.


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