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I have some cash in the bank I am ready to invest.

My company has been profitable since 20 years and provides a generous dividend of roughly 8% per year. So I though buying some stocks could be a good operation.

What I fear is the evolution of the price of the stock. Even if the dividend is good the price of the stock could go down an cancel my profit.

Pros:

  • attractive dividend yield
  • over a period of 10 years the dividend reimburse the initial investment
  • I am inside the company so I know how it works and I believe it might still be profitable for several years

Cons:

  • dividend yield is not guaranteed and could be reduced in the future
  • stock price might drop and cancel dividend earnings

Would it be a sound investment or would it be more clever to create a portfolio of several companies offering a similar dividend to reduce my risk?

Octoplus
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4 Answers4

41

Generally, it is considered a bad idea to put significant parts of your money in your own employer's stock, no matter how great the company looks right now. The reason is the old 'don't put all your eggs in one basket'.

If there is ever a serious issue with your company, and you lose your job because they go down the drain, you don't only lose your job, but also your savings (and potentially 401k if you have their stock there too). So you end unemployed and without all your savings.

Of course, this is a generic tip, and depending on the situation, it might be ok to ignore it, that's your decision. Just remember to have an eye on it, so you can get out while they are still floating - typically employees are not the first to know when it goes downhill, and when you see it in the papers, it's too late.

Typically, you get a more secure and independent return-on-invest by buying into a well-managed mixed portfolio

Aganju
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2

Your cons say it all.

I would not be buying stocks based soley on a high dividend yield. In fact companies with very high dividend yields tend to do poorer than companies investing at least part of their earnings back into the company.

Make sure at least that the company's earnings is more than the dividend yield being offered.

1

Dividend yields are a product of the dollar amount paid to shareholders and the stock price. Dividends yields rise when a company is shunned by investors. It may be shunned because the earnings and/or dividend are at risk. Recent examples are SDRL and KMI. Most investors would love an 8% yield so I would wonder why the stock is being ignored or shunned.

fendermon
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Dividend yield is not the only criteria for stock selection. Companies past performance, management, past deals, future expansion plans, and debt equity ratio should be considered. I would also like to suggest you that one should avoid making any investment in the companies that are directly affected by frequent changes in regulations released by government. All the above mentioned criteria are important for your decision as they make an impact on your investment and can highly affect the profits.

Stephany
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