Look out! A tidal wave of special dividends is coming

One big ‘dividend danger’ to avoid

a woman

“If there is one thing Australian investors love more than dividends it is franked dividends. Or fully franked dividends,” says The Australian Financial Review.
The financial press isn’t usually known for understatement, but this may be a rare case.
This week’s trading on the ASX is a particularly vivid–some might say egregious–example. Consider this…
Shares of small-cap Coventry Group (ASX: CYG) leaped 14% in the last few days on news that the company may pay five special, fully franked dividends of 11 cents a share over the next year.
Here’s the rub…
With new company tax rules due to take effect in July 2015, Australian investors could lose some $5 billion worth of franking credits now “sitting on company balance sheets,” according to The Fin.
That’s if companies don’t issue special dividends first.
Like Coventry Group, retailer Harvey Norman (ASX: HVN) and Reece Australia(ASX: REH) could be among them.
But before you join the crowd and rush headlong toward the lure of a juicy dividend…
Think for a minute about this major investing danger that could cost you big time…

Avoid this investing danger

My late grandfather Charles was an avid investor most of his life. He grew up during the Great Depression and was entirely self educated, so it was all the more remarkable that he eventually became such a success.
A ship captain, he amassed a small fortune by working, saving and investing in shares. He particularly loved bank shares’ dividends. A company’s dividend payment was his first consideration when investing.
Unfortunately, dividends were his last consideration too. He didn’t pay enough attention to how the underlying companies were managing their businesses, or whether those businesses were on a firm footing.
You might have guessed the ending by now. At the time of his death, he was heavily weighted in banks, and the year was 2009. The fortune he’d spent his life building had shrunk 50% or more. 
Of course there are other investing lessons here – not just the obvious one that we must pay attention to more than dividends.
(And the good thing is, my Grandad had a great life no matter what he left behind.)
Yet it’s an investing lesson I’ll never forget. And one that seems to get more relevant every year! 

Read on below to discover the gold nuggets that 5 Foolish investors shared when asked this same question: “What’s the best investing advice you ever received?”

The best investing advice I ever received

1. “Compounding is a wonderful way to become rich,” says Scott Phillips, Motley Fool Share Advisor investment advisor. “A little saved, regularly, can become a huge amount, thanks to the miracle of compound returns.”
2. “Start investing today—early in your life—but do not be greedy,” says Mike M., a Motley Fool Share Advisor member in Logan City, Queensland. “Start with what you are able to and build from there. Time is on your side if you do this.”
3. “Don’t buy the handbag, buy the company,” advises Erin Bouwmeester, head of The Motley Fool’s member support team. “Remember that you can use your insights as a consumer to think about potential investments in companies like Oroton Group (ASX: ORL).”
4. Matt Joass, an investment analyst on Motley Fool Pro, says to keep in mind Warren Buffett’s quote about buying stocks opportunistically when prices drop:
“I’m going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the ‘Hallelujah Chorus’ in the Buffett household. When hamburgers go up in price, we weep. For most people, it’s the same with everything in life they will be buying — except stocks. When stocks go down and you can get more for your money, people don’t like them anymore.”
5. “Look for what can go wrong, not just what can go right,” says Andrew Page, a Motley Fool Share Advisor investment analyst.

“Most investors are too caught up in the upside potential. By focusing on the downside, you get a better sense of the risk. This helps you avoid the investments that can wipe out gains made elsewhere.”

What’s the best piece of financial advice YOU ever received?

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of August 16th 2021

Motley Fool Writer/Investment analyst Catherine Babb-Muguira doesn't own shares in any companies mentioned.

More on ⏸️ Investing