Dividend shares are a well-liked option to earn passive revenue on the inventory market. The common funds made to shareholders can equate to an honest movement of money.

When investing in dividend shares, early buyers usually fall foul of some widespread errors.

Listed here are two to bear in mind.

Not all corporations are created equal

There’s no shortcut when selecting dividend shares and no single mannequin that applies to all corporations. When contemplating investing for dividends, the person strengths and weaknesses of attain firm have to be accounted for.

That is notably true in terms of dividend protection. This metric is used to evaluate how a lot money the corporate has to cowl its dividend obligations. Presumably, if its money is lower than the complete quantity of dividends, there’s going to be an issue.

Firms that want regular money movement to function sometimes pay a low dividend and as such, have excessive protection. Nevertheless, some corporations don’t want a lot money to function and so pay a excessive dividend with low protection. This reveals how low protection isn’t essentially a nasty factor.

It’s vital to learn the way the corporate operates earlier than making a call primarily based solely on protection. Even an organization with excessive protection could lower the dividend if it has a number of debt to finance.

These components differ from firm to firm, so each must be assessed on a person foundation.

Investing for the yield

Investing purely for the yield isn’t long-term technique. Yields fluctuate wildly and are sometimes excessive for the unsuitable causes, equivalent to a crashing price. 

Some buyers purchase shares simply earlier than the ex-dividend date as a option to lock in a yield at a sure stage. This is usually a sensible technique however doesn’t assure something. Ignoring the corporate’s fundamentals and potential price actions is dangerous. If the inventory falls greater than the yield earlier than cost, then it’s all for nothing. 

Earlier than making a call primarily based on the yield, buyers ought to all the time fastidiously assess the corporate’s monetary place.

Examples to think about

In 2023, Vodafone had one of many highest yields on the FTSE 100, at 10.8%. However falling earnings pressured it to slash the dividend in half, bringing the brand new yield nearer to five%. Buyers who purchased for the yield and didn’t foresee the issues would have been upset.

Fellow telecoms big BT Group at present has a yield of 5.7% and enough money to cowl dividends. Nevertheless, it’s drowning in £18.9bn of debt, ramping up the potential for a dividend lower within the close to future.

The specialist staffing firm SThree (LSE: STEM) appears to be like extra promising and could also be value contemplating. It has a 5.8% yield that’s well-covered by money flows. Moreover, its money has virtually doubled since 2021 whereas its debt has decreased. Annual dividends have additionally elevated from 11p to 16.9p per share.

However a difficult job market led to a revenue warning final month that spooked buyers. An anticipated 61% decline in pre-tax revenue brought on the inventory to crash. Now with a price-to-earnings (P/E) ratio of solely 6, it appears to be like enticing. But when the market doesn’t get better, it might nonetheless fall additional.

Nonetheless, I like its long-term prospects. Income has been climbing for a number of years and analysts forecast on common a 30% price enhance within the subsequent 12 months.