3 Traps Dividend Investors Should Avoid

Investors enter the stock market for a variety of reasons. Some want to get rich quick, some are trying to build long term wealth and some are looking for income. It is this third group - those engaged in dividend investing - that this article is aimed at. Members of this group include retirees looking for a stable income and other investors looking for a passive income stream to supplement and eventually surpass and replace their primary income stream. But what are the traps in choosing stocks for their high dividend yield?

The first thing to check is whether the current dividend yield is sustainable. A simple way to check this is to look at the dividend payout ratio for any given prospective stock market investment. The dividend payout ratio is the percentage of profits which a company has distributed to holders of its stock. A payout ratio of greater than 100% could spell trouble. This means the company is paying out more to stock holders than it is making in profits. Obviously this isn’t sustainable over the long term. The most likely eventuality here is that the amount payed out to stock holders will drop in future years.

The second thing to check is the dividend history. Does the company have a consistent history of paying dividends? In the most recent period (upon which the published dividend yield is normally based) was the amount payed significantly higher than in previous years? If it is, can it be justified by a permanent increase in the level of profits? If not, in all likelihood, the payout will return to levels of previous years at some time in the near future.

The last thing to check is a little more difficult to pinpoint. A high dividend yield normally indicates that the stock price of a company is relatively cheap. This would normally be the result of negative market sentiment. Perhaps there’s been a profit warning. Or industry the business operates in might be in decline. Whatever the reason, you need to make it your mission to find out why the stock is cheap. Being armed with this information enables you to make a much more informed decision.

Once an investor is satisfied that the dividend yield is sustainable, the dividend history is strong and that there are no long term problems with the company, only then should they consider committing capital to such an investment. As with any investment in the stock market, dividend investing requires thorough research. Only then can an investor expect a good result.

Looking for more tips on dividend investing? Visit the Stock Market Investing For Beginners blog for more tips and information on dividends and other investing topics.

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Reading Candlestick Charts Like A Professional

Candlestick patterns are used by each and every kind of trader. Day trading and swing trading utilize candlesticks as a way to read chart patterns quickly and efficiently, while getting the same data offered by bar and HLOC charts. Professional traders love candlesticks because they can be read much quicker than a bar chart, while also allowing a different kind of technical analysis known as candlestick reading.

Modify for Your Style

Your trading style has much to do with whether or not candlesticks can become a part of your everyday trading technique. Developing a trading plan around candlesticks can be difficult, and thus, it is best to use candlesticks to supplement an already complete trading plan. There are many trading seminars put on by professional traders to study the key to candlestick investing and why chart patterns exist.

Candlesticks are just one of many tools to make consistent profits. Just as Japanese traders have used for hundreds of years, candlesticks can show chart patterns before they happen. For example, a large wick with a small downward body at the end indicates indecision, or that the market may be ready for a reversal. It would be hard even for a professional trader to see this without the graphical display that candlesticks give to an investor.

Use Your Own Plan

Investing is difficult enough without the use of candlesticks. Many traders prefer to use their own basic trading plan and then incorporate candlestick chart patterns as a confirmation. The day trader prefers these candlestick chart patterns because scalping and other short term positions have very small windows of opportunity. Candlesticks let you read and comprehend more data in less time.

A complete trading plan should allow for some candlestick patterns and other chart formations. A well worked strategy can handle the addition of a candlestick confirmation, while less complex strategies might not be diverse enough to accompany candlesticks. Many profitable trading strategies use a mix of both, straight technical analysis mixed with candlestick reading to produce consistent profits.

Use a Planner

A trading plan planner will help you throw in a mix of candlesticks without overdoing your strategy with too many variables. For the most part, a candlestick chart is just like a bar chart, but is also its own technical indicator. For instance, a small cross-like candlestick often means the bottom or the top of a chart, thus buying or selling should ensue depending on current momentum.

About the Author:
Leroy Rushing is an active, professional day trader; trading coach; and author. He is the Founder and CEO of Trading EveryDay, a distinguished provider of educational trading products and services that are available worldwide. Trading EveryDay also has many articles with unique perspectives on day trading.

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