This is one common mistake by the newbie trader; you should not pick a stock on just because they’ve offered very good high dividends. Some company will post at least 100% stock dividend… nice huh? Imagine if you have availed this dividend, then you’ll be entitled of additional 100% of your shares on the payment date. But take note that price stock may drop drastically if the company didn’t able to meet the earning estimates. However, your holding shares dividend is still intact.

If the company wasn’t able to meet their expected earning targets, they will now facing a major problem. What I’m trying to stretch-out is that you shouldn’t consider the dividend earnings as the only factor that will influence you decisions. For better safety measures, you should make closer examinations of the company’s fundamentals, especially if you’re buying this stock for long-term investment.     

Other way to avoid this trap is to monitor always the volatility of the company. And also to check the company’s pay-out ratio, these values will provide you an idea on how much the company management tends to distribute dividend to the shareholders.

Payout ratio = is the percentage of earnings to be given to the shareholders in form of dividend. Computed as: