The disadvantages of stock investing are easily overlooked. Is this really a stable path to wealth? Who are the most suitable for it?

Many investors are attracted by the story of “regularly buying and holding stocks to receive dividends and easily achieve financial freedom,” but they often overlook the pitfalls behind dividend investing. Holding stocks long-term like savings—waiting for dividends—sounds simple and easy, but the risks and limitations of dividend investing are much greater than imagined. What are the actual disadvantages of dividend investing? Can it truly help people earn steady profits, or is there more to the story?

What exactly is dividend investing?

The concept of “dividend investing” comes from viewing stocks as a savings tool—buying and holding long-term, accumulating returns through dividends paid by listed companies. This approach is similar to depositing money in a bank to earn interest, hence the name “dividend investing.”

In Taiwan, dividend investing has become a popular investment strategy, with success stories circulating online about earning tens of thousands of NT dollars monthly from dividends and enjoying a worry-free retirement. On the surface, dividend investing has many attractive features—no need for frequent trading, no requirement for technical analysis, and a relatively light psychological burden. But the question is: if dividend investing were truly as simple and stable as promoted, why isn’t everyone getting rich through it?

The disadvantages of dividend investing: risks you must know

Disadvantage 1: Principal risk always exists

Unlike fixed deposits in banks, which guarantee principal safety, dividend investing is a form of investment—the most fatal flaw is that it does not guarantee principal protection. Many investors make a critical mistake—focusing only on dividend yield and ignoring stock price risk.

A real-world example is very convincing: take Rebar (3373), which announced a NT$10 dividend in 2021, with a yield exceeding 15%. This attracted many dividend investors to buy in. However, the stock price later plummeted by half, from NT$70 down to NT$22. The dividends earned were completely wiped out by the sharp decline in stock price, ultimately turning into a classic tragedy of “receiving dividends but losing principal.” This proves that dividend investing is not risk-free or stable.

Disadvantage 2: Limited liquidity

Choosing dividend investing means tying up your capital long-term. If you suddenly need cash, you may be forced to sell at an unfavorable time. For example, if you need cash just before dividend payout and the stock price is at a low point, selling not only means missing out on dividends but also incurring losses due to falling stock prices.

Therefore, funds used for dividend investing should come from idle money that won’t be needed in the short term. If the money is reserved for daily expenses or emergencies, dividend investing is not suitable, as it could trap you in a forced sale situation.

Disadvantage 3: Stock selection is much more difficult than it seems

Because dividend investing simplifies subsequent management, the initial stock selection becomes crucial. The success or failure of dividend investing depends on the quality of the stocks chosen, which requires analyzing not only dividend yield but also industry prospects, company fundamentals, valuation fairness, and other multi-dimensional factors. Many novice investors only focus on high dividends and end up making mistakes.

Disadvantage 4: Limited short-term gains

The advantage of dividend investing is fully realized through long-term compound growth and market expansion. In the short term, market volatility and investor psychology dominate stock price movements, making short-term returns unpredictable and highly volatile. For those seeking quick profits, the potential gains from dividend investing are significantly limited.

A true comparison of the pros and cons of dividend investing

Dividend investing is not without its advantages. Overall, it offers: time and effort savings (no need for frequent monitoring), stable income from dividends, participation in company growth, shareholder rights, and relative resilience during downturns.

However, the disadvantages and advantages of dividend investing are like two sides of the same coin—its simplicity and peace of mind come with high initial stock selection pressure; its emphasis on long-term holding means it may not meet short-term cash needs; and its reliance on patience means profits are not guaranteed.

Who is more suitable for dividend investing?

Not all investors are suited for dividend investing. The following traits are more aligned with its characteristics:

Long-term investment mindset: Willing to view investments over a longer cycle, regularly allocating idle funds for continuous investment, rather than expecting quick profits.

Lower psychological resilience to volatility: Investors sensitive to fluctuations need a relatively stable strategy. The low-frequency trading nature of dividend investing can reduce psychological stress and avoid losses caused by over-trading.

Risk-averse tendencies: If you have low risk tolerance and prioritize long-term dividend income over aggressive capital gains, dividend investing can be a suitable choice.

Basic analysis skills: Able to evaluate a company’s performance stability, industry outlook, and growth potential, rather than relying solely on dividend yield.

Conversely, investors eager for quick results, with frequent capital turnover and high risk tolerance, may find dividend investing less optimal.

Three reference directions for selecting stocks for dividend investing

Once you decide on dividend investing, choosing the right stocks is equally important:

Financial stocks: Banks, insurance companies, and other financial stocks are popular for their stable dividends and solid fundamentals. However, be aware of market changes and timing; don’t blindly assume “big financial stocks won’t fail, so they will definitely rise.”

Industry leaders: Leading companies in their sectors often have stable operations and strong dividend-paying ability. If you want both dividend income and stock price appreciation, industry leaders are good options.

ETFs: Index-tracking ETFs diversify your investment across many stocks, inherently reducing risk. They are especially suitable for beginners. Popular choices include Yuanta High Dividend (0056), Yuanta Taiwan 50 (0050), and similar products favored by dividend investors.

How to avoid the disadvantages of dividend investing

Careful stock selection

Choosing the right stocks is half the success. Beginners are advised to start with ETFs to gain experience, then gradually expand to individual stocks. Don’t be fooled by high dividend yields; evaluate the company’s quality comprehensively.

Scientific capital allocation

Clearly distinguish between long-term investment funds and short-term reserves, and set aside necessary living expenses. Avoid using investment funds for emergencies, which could force you to liquidate at the worst timing.

Choose compliant platforms

The safety and transparency of trading channels are equally important. Prioritize regulated institutions and compare transaction costs across platforms.

Summary

Dividend investing as an investment strategy is not impossible, but investors must understand the true nature of its disadvantages—principal risk, limited liquidity, stock selection difficulty, and limited short-term returns. It is not the only path to wealth and cannot guarantee stable profits. A prudent approach is to tailor your investment plan based on your goals, risk tolerance, and timeline, and avoid blindly following trends. Dividend investing can be part of a diversified portfolio but is not the sole solution.