5 Traps to avoid on Dividends

published on 27 June 2023

Let us review the five very classic traps for investors and start with a little reminder that the dividend is quite simply part of the result that a company decides to pay back to the shareholders of a company. If it makes profits, then the company can decide to use them as they want and reserve them on its balance sheet. In this case, use the results to reinvest and to buy back your own securities which is called a share buyback, or to reduce debt.

When it comes to dividends, the notion of a dividend is undoubtedly among the most well-known, not just in the world of investing but also outside of it. I believe that most people would be almost ready to explain what a dividend is.

They may also choose to distribute a portion of it in the form of dividends to their stockholders. Retail investors really like dividends for this reason. Although it is neither a criterion nor an investment criterion, I am aware that performance values, such as total commitment to its shareholders, are among those that are closely monitored by businesses. They absolutely do not want to touch their dividends because they know very well that it is an extremely important criterion for them. This article is precisely for investors who love dividend cities so as not to fall into any traps.

The first trap is buying a stock right before the dividend in order to profit from it.


Since dividends or coupons on bonds or other securities have been around for as long as stock exchanges have, the market has always been fairly arbitraged, and the share price decreases by the dividend amount on detachment day. The payment of the Air Liquide dividend this year serves as an example of how a detachment occurs, so May 11, Monday, was the date of the detachment. This day, which is also known as the Ex-Dividend date marks the point at which you stop receiving dividends if you buy.

Why do we need to get a little more specific? This is due to the fact that for Air Liquide, Tuesday, May 12, is the date of closing positions, just as delivery of the securities occurs at time +2. To be delivered on time if you buy on Monday, the 11, you must buy no later than Friday, the 8, two days after the purchase. On Wednesday, March 13, you will receive securities that are concretely attached to your portfolio as of this renowned detachment and ex-date. Although it is too late, the most crucial thing is that you will actually be delivering securities on Wednesday, the 13, before you can even see them show up on your portfolio.

It is important to understand that buying before or after the dividends has no impact if a share is worth 100 Euros and pays a dividend of 5 Euros. The price will drop by 5 euros at the ex-dividend date, but precisely, there is no possible arbitration, and that day there will still be a variation like every trading day. There are variations, but 95 euros is recalculated as the value of the BEI stock market price. For instance, if the price opens at 96 euros on the ex-dividend day as opposed to 100 euros the day before, you will observe an increase of 1.0 % and not a decrease of 4%.

The second trap for investors is that individuals love the dividends.


It will become an extremely important criterion in their choice of securities. The distributable profit can either be retained by the business or distributed as dividends to the shareholders, but you must always exercise caution in this decision. If a company is very efficient, its performance matters much more than its dividend. It is better that they reinvest or that it buys back its own shares. For example, if it is too indebted, it is better that it reduces its debts rather than bleeding itself to please its shareholders. This has already happened. and we have seen companies that bleed themselves to maintain their dividend until the end to finally go bankrupt.

This brings us to the third trap. If you are mainly looking for high-yield stocks that pay large dividends, then you will find yourself overinvested in certain sectors.


Using the Stoxx cleaner from Zone Bourse, I have looked at the stocks with the highest yield by putting a certain amount on France and by putting a certain market capitalization threshold. We end up with NCIÈRES oil companies, telecoms, banking utilities, and conversely. By this, you will have no growth value since it would have invested as much as possible.

This results in the fourth trap, which is to look at who is still linked to the third and to look at the yield in % without realizing that the yield has exploded.


The share price has fallen enormously, so you have to take the risk that the dividend will be cut and find out for yourself if it really is. If you look at the biggest yields in %, you will end up with all the losers on the market and you will not understand why you will lose money. So you only invest in stocks that theoretically and practically offer enormous returns.

The fifth trap is taxation.


So of course, you may be invested through life insurance in a pea, etc.

Nevertheless, what you need to know is that in the majority of cases and in most countries, the income is taxed more than the capital gains, so it all depends, of course, on your personal situation in terms of your additional income, etc. However, it is true that the income remains in the company for as long as possible. This is because of the concept of compound interest, which means that my investments face as little risk as possible.

Personally, I think it's best to file taxes as late as possible to keep them inside the company's envelope. If you are looking for businesses with strong growth in particular, you should be paid to quote typical capital gains as late as possible, i.e., at the time of sale.

Key Takeaways: 

1. Buying a stock right before the dividend in order to profit from it is not a good idea. 

2. Investors should be cautious when choosing securities based on dividends. 

3. Investing in high-yielding stocks can lead to overinvestment in certain industries.

4. It is best to keep taxes inside the company's envelope for as long as possible.

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