A wide variety of things can be the object of affection for different people. One of the things I have a growing passion for is owning dividend shares. The prospect of extra income, thanks to investing money in beautiful blue-chip shares, warms my heart.
But, as with true love, the course of investing never did run smoothly. Here are a few investment lessons learned as I deepened my relationship with dividend shares.
Looks aren’t everything
Some shares have a very striking look to them. The dividend yield of 16% at housebuilder Persimmon (LSE: PSN) certainly catches my eye.
But shares might not always be what they seem at first glance. Yield is often calculated using historical data. That does not tell me what I could expect in future if I bought the shares today. It just tells me what other people were paid in the past. But I am not interested in the exes so much as what comes next!
Persimmon has announced a new dividend policy which, for the short term at least, means its 16% yield is likely to be a thing of the past. Such information is publicly available for free online, as listed companies report detailed financial information and accounts to the stock exchange.
As an investor, rather than being swayed too much by first appearances, I really need to get to know what lies beneath a share’s initial look.
Considering a future together
In the case of Persimmon, I think what lies beneath a reduced yield is in fact a fairly attractive business. The business has a solid heart, with its proven business model, high profit margins and strong balance sheet.
For now, there is a risk that falling house prices could hurt profits at Persimmon. So I am waiting to see what happens to the housing market before considering whether to make a move on these dividend shares.
But rather than just focus on the short-term financial prospects of Persimmon, I am looking to what I think is the underlying character of the company. Does it seem reliable? Does it know what it wants, in the form of having a clear strategic focus? Do I see a promising future?
For me as an investor, a company’s short-term financial position is worth considering. But so too are its future prospects.
Let’s stick together
If I do decide to invest in Persimmon at some point, it will probably be much more than a fling. As a long-term investor, I like to buy and hold shares for years, or even decades.
That is because I do not just scoop up dividend shares for a quick payout. Instead, I see myself as purchasing a small stake in a business I hope will prosper for a long time to come. If it does so and distributes its excess cash with shareholders in the form of dividends, that could provide some lucrative extra income for me far into the future.
The post I’m falling in love with dividend shares! appeared first on The Motley Fool UK.
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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.