I was doing a lot of reflection on where my portfolio currently is at, and where I think it could have been at due to a few dividend investing mistakes. now, don't get me wrong. I'm extremely happy with where i'm at currently but I feel that it is always important to self analyze and challenge my own investment choices. I did a big no no with this last stock purchase and it cost me pretty big. It could have been a lot worse if I didn't keep my emotions out of the way and let self control get the best of me.
This article is going to really focus on what I did wrong with my stock purchase of GME, and what I did right near the end. I've thankfully learned a lot over the years and I'm continuing to learn more every day to become a better investor. That's why I really wanted to share my experience with this one so hopefully some people could avoid it also or they can learn how to react in the situation.
Like a fool I got caught up in the dividend yield of the company and I really didn't ask myself challenging questions such as "Will this company be around and continue to be profitable and grow over the years." This was obviously a dangerous situation and I did convince myself that this company was stable because they did have a really good financial spread sheet. I overlooked the fact that organic sales in their core product of disc video games was declining quarter after quarter. I also overlooked the fact that digital game downloads have been growing hand over foot recently and people are no longer stepping into a Gamestop to purchase their video games.
I was enticed by an amazing dividend yield of over 6% and a sweet payout ratio of under 50% which told me the company could grow it's dividends even more. I felt that the company was also at a good price currently so I bought in with $2,200 and I felt I had secured an amazing spot and the company was going to be moving on up. I was so wrong though. I bought in at the high of the share price rally and I took a nice hit just a few weeks later. I watched and watched as my position value dropped lower and lower every week. The first hit the company took was when Microsoft announced they would be doing a paid subscription program to play online games which caused the stock to close 13% lower in a single day. the company did rally a bit after wards but it never got closer to my initial purchase price.
Despite the paid subscription service being launched I still felt that the company had a fighting chance for awhile and I remained hopeful that the company would rally back into the $25 range and I could just hold out for a few dividend payments. However, this is a very poor mentality to have and I should have gotten out after that initial lose. The second big hit I took was when the company released their earning results for the holiday quarter. They saw a decline in store traffic, video game sales and hardware sales. Revenue also missed Y/Y by -13%. This threw the stock into another major decline and I saw another 9% shaved off my position value. This is when it finally hit me, it took a lose of 21% before I had really decided it was time to get out.
Thankfully though I didn't follow my emotions and sell out of fear and preservation. I have been following stocks for awhile now and I know that typically after a big sudden drop in share price caused by something such as a missed expectation will typically cause a bounce back in share price. It's not often that the bounce will return to the original value when the stock dropped, but I knew if I just waited out the positive trend reversal and waited for the steam to run out of the run that it would create a good exit point to sell.
This method proved to workout perfectly as I walked away from the position with a lose of 16% as opposed to a lose of 21% if I would have sold out when the stock hit it's low. Some may argue that I could have stayed in the position longer but honestly I didn't want to have my funds tied down into a position that has the ability to lose 13% in one day. All it took was one silly news article about Microsoft releasing a new gaming plate form and it sent the stock into a downward spiral. That's not the kind of safety and security I know and love from dividend stocks at all.
I'm really working hard to do more research into company's that also have an amazing track record of growing dividends Y/Y. I'm sure many of you have already heard of these but companies that have increased dividend payments for 25 consecutive years are called dividend aristocrats. These are amazing companies that continue being profitable and like wise continue to payout higher dividends every year. These typically have a lower dividend yield in general but over the long run these companies will provide on average a higher rate of return in comparison to companies who are not in the dividend aristocrat spectrum. They also provide investor with the safety and security that dividend investors are typically seeking.
What I learned from my lose
This was a rather expensive lesson to learn but I guess sometimes we have to learn things the hard way and man do I learn quickly when it involves me losing my precious capital. I really wanted to blog about my experience and to hopefully educate some on loses I took so maybe one day they can reflect back on this article and say to themselves, maybe I should look at the long term on this company and not only the dividend yield.
This lesson has really helped me with my most recent investments and I really ask myself deeper questions before I purchase into a company. for example, a major one that I have been really applying is will this company be around for the next 10 years? Is their business model secure and will they continue to be more profitable over the years to continue to grow their dividend payments.
These are just a few of the big ones I learned from this lesson and It has really helped me become more aware of my purchases. I used to think that I already did a great job around this aspect but sometimes we all mess up. It's important to remember that I still have plenty of time on my side and that tomorrow is a new day. Another important aspect that comes into play when an investor takes a stock lose is that I will be able to write this off as a capital lose and this will help me out at the end of the year to off set some of my dividend income.
That's the end to my worst purchase ever and I hope this will help someone down the road.