There are many advantages to owning dividend paying stocks.  One of these you may not have thought of is how they can protect you from bad management decisions.

You see, the CEO’s and top management of corporations are people too, which means they make mistakes and can get caught up in emotion and ego, rather than rational reasoning, just like the rest of us.

Which can lead to bad management decisions.

Which can lead to you losing money in their company stock.

But by knowing they have to pay dividends to you and me as owners, every quarter, they have to keep focused on making a profit by spending the company’s money wisely.  This is exactly what you and I, as stock investors and business owners, want them to do.

So what kind of bad decisions can dividend paying stocks protect us from?

I would say we’re protected from a loss of sense of value – when the company is very profitable and has a lot of free cash.  We all know that feeling, don’t we?  When we’ve come into a small windfall of money.  And the money just burning a hole in our pocket, begging us to spend it.

And I often relate this to the fate of people who win big lotteries.

They are literally overwhelmed by the money.  And it causes them to lose their sense of value.

Do you know that the vast majority of these big winners wind up broke within five years?  And make bad life choices.  And watch their quality of life deteriorate away.

Like the case of a $315 million Powerball jackpot winner.  Ten years after his “good fortune” he told reporters he wished he had torn up the ticket and never cashed it.

Why?

Because by then, his daughter and granddaughter had died of drug overdoses, his wife had divorced him, and he had been sued numerous times.  And he was even drugged at a strip club, so someone could take $545,000 in cash that had been sitting in his car.

Would you leave $545,000 in cash sitting in your car?

Talk about a loss of sense of value.

And a similar fate can await cash rich corporations as well.

Quite often this is in play when companies decide to do a merger.

I think ego, or dreamy empire building thinking, starts taking hold in these situations.  As opposed to sharp focus by management on profits and value for their shareholders.

And there’s evidence to support this.

Did you know only one in three mergers ever really produce the benefits that company leadership thought they would?

Like the case of AOL/Time Warner back in 2001.

Some pretty smart people thought it would be a great idea to merge old school media giant Time Warner with new school internet and email provider America Online (AOL) for a whopping $111 billion.  It was thought to be the best of both worlds, combining print and electronic together.

But it didn’t work out – in fact, it was a disaster.

After the merger, Time Warner’s stock dropped 80%.  And ultimately, their CEO, Jeff Bewkes, embarrassingly had to announce that the marriage of AOL and Time Warner was dissolved.

It doesn’t take much imagination to think that both companies would have been better off, and the $111 billion better employed, by focusing on the shareholders, working to increase profits, and paying bigger dividends.

Of course, there aren’t any guarantees, that buying dividend paying stocks will totally protect you from bad management decisions like these.

But I think they greatly increase you odds of avoiding them.

And making a profitable investment.

So keep this in mind the next time you are casting about for a new stock to invest in.  Because all things considered, I’d favor buying dividend paying stocks and avoiding bad management decisions.

And a loss of sense of value.

To your health and prosperity – John Roberts

P.S.  To learn more about how dividend paying stocks can help you build your future paychecks and raises, and two stocks paying over 10% dividends, click here for our special free report and newsletter… Get Paid In Retirement.

John Roberts is the founder and CEO of LiveLearnAndProsper.com, “Commonsense about Investing and Life,” a leading newsletter / website featuring simple tips and explanations for informed living and investment success.

His recently published book, Stock Market For Beginners, takes beginners through stock investing basics with simple explanations of key information. By the end of the book you will know how to start and use an investment account, sources for great investment ideas, and how to place your first trade.

You can learn more about Stock Market For Beginners here… Stock Market For Beginners.