Important Lessons Learned From My Latest Investing Mistakes

theasis/E+ via Getty Images Investing in dividend stocks (SCHD) has been an extremely rewarding experience for me over the years that I have pursued it. In addition to generating market-beating total returns and providing me with an ever-growing stream of passive income, it has taught me a lot about business, investing, how the world works, critical thinking skills, and most of all, about my own emotional and mental flaws. It is often said that who you become in the process of achieving a desired goal is typically far more valuable and important than achieving the goal itself. In the case of dividend investing for me, that has proven to be no different. In this article, I will share several lessons that I have learned from some of my most recent mistakes on my dividend investing journey. Lesson #1 The first important lesson that I’ve learned is that just because a stock looks cheap and likely to be bought out by another company does not mean that it offers an attractive risk-reward profile. I recently experienced this with an investment I made in Atlantica Sustainable Infrastructure (AY). Unfortunately, I got in a bit too early, as I started buying right before interest rates shot up like a rocket. My initial purchase was made in early 2022 in the low $30s and the high $20s. However, as interest rates shot up in 2022 and 2023, the stock price gradually got beaten down, and AY’s growth stagnated. The long-term fixed-rate contracted cash flows from Atlantica’s power purchase agreements with investment-grade counterparties are viewed as bond proxies in nature, and the company’s increased cost of capital due to its falling equity price as well as rising interest expenses prevented it from being able to invest aggressively to drive new growth. This further compounded the company’s valuation headwinds and drove the stock down into the mid and eventually the low $20s, bottoming out in the upper teens. Along the way, the company, realizing that its growth engine had hit a major roadblock with interest rates being higher for longer and unable to grow its dividend at any meaningful rate, began to pursue strategic alternatives to rectify its growth headwinds and several rumors emerged that the company was a likely buyout target. Due to its strong balance sheet, high and fully covered dividend yield, defensive business model, and the attractive long-term outlook for the renewable power industry, I thought it was a “heads I win, tails I don’t lose much” investment, given that it also traded at a discount to many of its peers on an EV/EBITDA basis. I figured if it did get bought out, it would likely result in quick upside. If it didn’t get bought out, the dividend was very attractive, and over the long term, it would probably work out okay for me even if interest rates remained higher for longer. As a result, I doubled and tripled down on my investment, including making my last buy in early March at under $18 a share. While I did not do too badly on the investment, I still ended up slightly in the red in aggregate after it was announced in late May that the company would be bought out at a price of $22 per share. This was much lower than I expected, as my fair value for the stock was at least $25, but likely closer to $28 per share. Initially, I was quite shocked and disappointed with management. However, as I’ve since mulled over the situation, I realized that I made a couple of key oversights in my investment thesis. First of all, while it’s true that the interest rate headwind was likely finite in nature, Atlantica could not wait for a long time for interest rates to eventually return to a more favorable environment. This is because it had a fairly high payout ratio, which limited the amount of cash it could retain to invest in new projects, and it didn’t have a sponsor that could provide it with attractively priced dropdowns like peers such as Clearway Energy (CWEN)(CWEN.A) and NextEra Energy Partners (NEP) enjoy. Additionally, its largest shareholder, Algonquin Power & Utilities (AQN), which also has a substantial board presence at Atlantica, was likely pushing for a sale sooner rather than later as part of its activist investor-fueled drive to simplify its business model and become a pure-play regulated utility as soon as possible. As a result, Atlantica was not able to fully unlock shareholder value or ride out the current interest rate headwinds for a better long-term outcome. Instead, it had to settle early for the best deal it could get in an admittedly unfavorable environment for such a deal to take place. In contrast, other interest-rate-sensitive, bond-proxy, high-yield dividend growth stocks like Brookfield Renewable Partners (BEP)(BEPC), Brookfield Infrastructure Partners (BIP)(BIPC), and Realty Income (O) can afford to navigate the headwinds of higher interest rates in pursuit of maximizing long-term value for shareholders. These are the sorts of stocks that investors can target for long-term buy and hold investing, whereas Atlantica was actually a much more speculative investment than I initially thought due to the short timeline it had to unlock value for shareholders. As a result, moving forward, if I am going to invest in a buyout candidate, it needs to be one that is not facing external pressure to settle for a deal sooner rather than later, but rather one that can receive bids from interested parties from a position of strength and is able to continue with the status quo if nothing works out. Lesson #2 Another mistake I recently made was failing to take into account the inflation sensitivity of blue-chip mining companies (GDX). At first, I thought a gold mining stock was supposed to be a great inflation hedge because it has leveraged exposure to the price of gold, and gold is often thought to be a hedge against inflation. However, I made a couple of grave mistakes here in buying Barrick Gold (GOLD) and Newmont Corporation (NEM) too soon in the cycle. First, while gold does tend to rise over the long term due to the consistent destruction of the value of the dollar and other fiat currencies, it does not move up in perfect correlation to inflation. In fact, typically when inflation is running hottest, central banks are hiking interest rates at their most rapid clip. This generally serves as a headwind for gold prices, and it’s only when the cycle shifts and central banks ease their monetary policy, with interest rates falling and potentially quantitative easing even picking up as the economy enters a downturn, that gold tends to really take flight. As a result, I bought these stocks a bit early. Another headwind I failed to take into account is that while gold is often not perfectly correlated to inflation in the short term, many of its input costs are, such as labor and energy. Given that labor and energy costs have risen significantly in recent years, these miners have been hit hard in their input costs even as gold has only recently begun to move up meaningfully. The lesson learned here is that just because inflation is high does not mean that gold prices are going to go higher. Additionally, it’s important to be mindful of the inflation sensitivity of the input costs of blue-chip gold miners. Therefore, if one is to invest in them at all, the timing of the entry needs to be very important, namely buying them after steep dips and only when inflation input cost factors seem to be trending in a more favorable direction. They need to be viewed as cyclical trading stocks and not a blind buy-and-hold investment, especially when facing interest rate and input cost headwinds. In contrast, investments like gold (GLD) and silver (SLV) ETFs or physical gold and silver are probably better for a buy-and-hold mentality, given that they do not face input cost inflation risk. Since it’s hard to time gold and silver price movement cycles perfectly, it may be best to just hold a core insurance-like position in both of these for the long term as a hedge against geopolitical and macroeconomic calamity and then only venture into miners as a leveraged bet on gold prices when conditions appear to be opportunistic to do so. Lesson #3 A third mistake I made recently was investing fairly aggressively in a couple of high-yield and what I thought were conservatively run regional bank stocks (KRE), with New York Community Bancorp (NYCB) being one of them. At the time, NYCB’s dividend was attractive and very well covered by earnings. The loan book, while exposed to some risk with commercial real estate in New York City, seemed fairly defensive and had relatively low commercial real estate exposure, and the company’s track record was excellent. However, my biggest mistake was, first and foremost, underrating the regulatory risk and uncertainty in the banking sector, especially in the regional banking sector. Secondly, I underrated the impact of market sentiment and media hype on a bank, especially a regional bank. Thirdly, I failed to take into account the challenges they would undoubtedly face from absorbing the huge amount of assets acquired from Signature Bank early in 2023. Unfortunately, all these risks came to a head at the same time, causing the stock price to plunge dramatically and leaving me with meaningful losses on this investment, even after making significant money off a trade in and out of the stock in early to mid-2023. The lesson learned here is that I do not think the community banking sector is a good fit for me, as it is simply filled with too many unknowns, making investments in it inherently speculative in nature. In contrast, sectors with less regulatory risk and bank run risk, like business development companies (BIZD), especially ones with strong track records for quality underwriting like Main Street Capital (MAIN) and Ares Capital (ARCC), or the big banks like JPMorgan (JPM) and Bank of America Corporation (BAC), are much less speculative in nature than regional banks. Investor Takeaway With these lessons learned in mind, I think I will be a better dividend investor moving forward, as I’ve been able to cross off one sector that is not in my circle of competence (being regional banks), which should help reduce the number of mistakes I make moving forward by further refining my pool of potential investments. I also believe I now have a better handle on how to invest in the precious metals mining sector. Finally, I also learned a hard lesson about how to approach buyout candidates and interest-rate-sensitive high-yield bond proxy stocks in general, which should enable me to navigate interest rate cycles in a more attractive risk-adjusted manner from a long-term perspective. While I am blessed to be able to say that my overall high-yield investing track record has been quite strong, at the same time, I definitely continue to make my share of mistakes and strive to learn from them in order to make myself an ever-better allocator of capital.