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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?

  • 16
    Check whether there's an employee stock purchase plan, and is so how mych discount they offer you and how it works. Getting stock at 5% off the current price, for example, provides a significant advantage. – keshlam Dec 27 '15 at 1:07
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    Remember that past performance does not guarantee future results. A company that has been profitable for 20 years can still go bust on year 21. Thats not to say you shouldn't invest with your current employer, but give it the same due diligence you would give any other investment decision. – Reinstate Monica Dec 27 '15 at 4:57
  • Realistically, do the two "cons" you have listed not apply equally to any stock market investment? – a CVn Dec 27 '15 at 21:11
  • Related: Why does a company pay dividends at all? (and probably a large fraction of the questions here tagged dividends) – a CVn Dec 27 '15 at 21:12
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

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    This is advertised as "general" advice, and I disagree with it at that level, even with the caveats that "depending on the situation, it might be ok to ignore it." You may well have more insight into your own company that lets you give it a very more specific evaluation than a general investment on the market. Having some diversity in your portfolio, of course, is a good idea, but there's absolutely no reason that you take a generic position against it. Evaluate it on it's own merits, just like any other investment. – user32479 Dec 27 '15 at 0:57
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    One word:Enron. – mhoran_psprep Dec 27 '15 at 1:06
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    I'm with @Brick. If the answer had said "it is considered a bad idea to put too much of your money..." I'd agree wholeheartedly, but the way it reads now, it seems to be suggesting not putting any of your money in your employer's stock, which, as a general statement, I disagree with completely. – blm Dec 27 '15 at 1:24
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    Aganju said it right. Income from your job is part of your overall portfolio so unless your income does not correlate with company profits at all you already have a large positive allocation in your employer. Purchasing equity in your employer drives this exposure yet higher and has the effect of reducing portfolio diversification. It is therefore generally true that buying stock in your employer is ill advised. Exceptions are unusual. – farnsy Jan 18 '16 at 23:00
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.

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    Do you have any references for your assertion: "companies with very high dividend yields tend to do poorer than companies investing at least part of their earnings back into the company" ? Not saying it's wrong, just interested to read about it... and not quite sure how to google it. – Peter K. Dec 27 '15 at 2:52
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    Indeed this year's dividend was more than company's earnings. When I asked why it was the case the accountant told me "Because we have a lot of cash and we do not use it fully, so we choose to reward stockholders". This lead questions to the sustainability of the company, but gives good hope that the dividend will stay very high – Octoplus Dec 27 '15 at 11:26
  • @PeterK., I don't need any references I have done my own research and you can too. You can do a search for high dividend paying stocks, say above 6% or above 8% and compare the charts for these stocks, there would't be to many with a rising trend, which means that if you bought and got an 8% dividend for the year you might have lost 10% or more in capital. You would be better of buying a stock paying 1% to 4% dividend which is going up in price, that way you might make a total profit of 20% to 30% instead of a negative total return. – user9822 Dec 27 '15 at 22:00
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    @Octoplus, that mean the company may not be putting money back in for research and development, and to grow the company further. The slightest downturn in the economy could cause both revenues and dividends to drop. – user9822 Dec 27 '15 at 22:03
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    @MarkDoony References are very useful. For instance, my own research would show that say SDY outperformed SPY in total return over the latest 10Y timeframe (though by a tiny amount). Not that I'm arguing that dividend stocks are better, just that comparing a few charts may not conclusively answer a complicated topic. chicagobooth.edu/~/media/3AA4879C57AA400C9E6203446A1EF195.pdf – rhaskett Jan 19 '16 at 22:10
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.

1

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.

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