Dividend investing is about buying profitable, timeless companies that put money in your pocket for decades. It’s a strategy built on consistency, not trend chasing.

However, that doesn’t mean dividend investing is risk-free or easy.

In fact, there are many situations where income investors get burned, sometimes losing enormous amounts of hard-earned capital. Here are three types of dividend stocks I personally avoid, and why doing so can save your portfolio from unnecessary pain.

You don’t have to be an expert in every company (or even every sector) you invest in. But you should be able to clearly articulate what a company does. As Peter Lynch once said, “Never invest in any idea you can't illustrate with a crayon.”

Chevron and Exxon Mobil pump and refine oil. When commodity prices rise, they sell that oil for more than it costs to produce.

eBay runs a marketplace and takes a cut of every transaction.

Clorox makes bleach and trash bags.

Simple.

Other dividend stocks, like mortgage REITs or specialty lenders, operate in ways that are often esoteric and highly complex. Unless you’re already a mortgage broker or niche lender, good luck explaining exactly how these businesses make money.

That may help explain why many high-yield, complex financial stocks turn out to be long-term losers, steadily eroding capital year after year.

Orchid Island Capital and Oxford Lane Capital are two examples. Many retail investors are drawn to their high starting yields. But Orchid Island owns assets that include “traditional pass-through Agency RMBS” and “structured Agency RMBS.” Oxford Lane “invests in securitization vehicles” that hold senior secured loans to below-investment-grade companies.

Call me presumptuous, but I’d guess 99% of retail investors couldn’t define “structured Agency RMBS” or “securitization vehicle.” That likely explains why these companies are routinely promoted as great income opportunities, despite both stocks declining more than 75% over the past decade.

Some companies pay a dividend but show little interest in growing it. These businesses combine a low starting yield with minimal dividend growth.

Dover Corporation, for example, is technically a Dividend King, with more than 50 consecutive years of dividend increases. The payout ratio is conservative, below 30%. Yet the stock yields just 0.90%, and its 5-year compound annual dividend growth rate is only 1%.

That doesn’t necessarily make it a bad investment. But a low starting yield paired with low growth means it will take a very long time to generate meaningful income.

If you’re investing so that you can eventually live off dividends, that matters.

Back in 2020, hard to believe that’s over half a decade ago, I was screening for high-yield stocks and came across Big Lots.

It’s not Walmart, but it’s a recognizable brand. As a kid, I bought the original Red Faction and XIII there. The stock was yielding around 8%. I wondered if it might be a hidden gem.

It wasn’t.

Further research showed the business was deteriorating and the dividend was at risk.

I passed, and that turned out to be the right call. Big Lots eventually filed for bankruptcy, and its shares became worthless.

Less extreme, but similar, situations have played out with high-yield brand names like Hanesbrands and Dow. A history of paying a high but stagnant yield can look attractive — right up until the dividend gets cut.

The old Wall Street saying, “the safest dividend is the one that’s just been raised” isn’t universally true. But it’s a useful rule of thumb. Companies that haven’t increased their dividend in years are far more likely to cut or suspend it during tough times than companies that consistently reward shareholders with prudent annual raises.

None of these rules are absolute. There are exceptions to every one of them.

But avoiding unnecessarily complex businesses, being cautious with low-yield and low-growth stocks, and thoroughly double-checking the balance sheet when you see a recognizable name offering an unusually high yield are all practical ways to reduce risk.

Stock prices move randomly in the short term. Over the long term, however, business quality matters.

The strength of the underlying company, the industry it operates in, and management’s commitment to shareholders ultimately determine outcomes.

Focus on those variables, and you dramatically increase your odds of success.

If you have enough money that you think about buckets for your capital…

Ever invest in something you know will have low returns—just for the sake of diversifying?

CDs… Bonds… REITs… :(

Sure, these “boring” investments have some merits. But you probably overlooked one historically exclusive asset class:

It’s been famously leveraged by billionaires like Bezos and Gates, but just never been widely accessible until now.

It outpaced the S&P 500 (!) overall WITH low correlation to stocks, 1995 to 2025.*

It’s not private equity or real estate. Surprisingly, it’s postwar and contemporary art.

And since 2019, over 70,000 people have started investing in SHARES of artworks featuring legends like Banksy, Basquiat, and Picasso through a platform called Masterworks.

My subscribers can SKIP their waitlist and invest in blue-chip art.

Just click this link

_{Investing involves risk. Past performance not indicative of future returns. Reg A disclosures at masterworks.com/cd}

Disclaimer: This article is for entertainment purposes only. It is not financial advice, always do your own research.