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Buying Dividend Yield is Not Defensive, its Stupid
The front page of today's Money and Investing section of the WSJ ran an article titled: Dividend Stocks Become the Heroes.
Dividend-stock fans say the unusually strong performance is likely to last as long as volatility driven by Europe's debt crisis and the global economic fits and starts continues to grip financial markets. Stocks that pay steady dividends tend to fall less than others when times are tough.
I completely disagree with this rationale, all this dividend focused jargon is BS. First of all, the trade is over. Not to mention making INVESTMENTS on the basis of ... "hey, I won't lose a lot" is insane. This fad will pass, but it sells well right now. In fact, most of these defensive/no-growth names trade at a significant premium to the S&P. Think about that for a minute - the 'yielders' so frequently recommended on business-porn television, with their huge debt loads, unfunded pension liabilities, and engineered earnings growth, trade at a premium to businesses with real revenue, earnings, and free cash flow growth. Por exemplo.... P&G is at 16's forward earnings and Google trades at 10x's. Hmmm. Because P&G has 'yield support'?
This yield 'strategy' is an easy sell to retail investors - hence the push by managers and the Street - who create/sell products around conventional wisdom. Bottom line - its too late. The chart in the article mentioned, showing the 'Dividend Aristocrats' outperforming, reinforces my point. 
Sanford Bernstein research analyst Toni Sacconaghi was referenced in this weekend's Technology Trader section of Barron's, making the following point with regard to Apple's cash position:
If Apple were to retain that cash balance but return 50% of free cash flow to investors, it would allow the company to pay a 5% annual dividend and still grow its cash reserves by $20 billion per year
I'd rather own a company like Apple over a utility yielding 5% - whether they pay out free cash flow to me or not. The point is that chasing dividend yield despite valuation is idiotic. Let management decide to pay dividends or allocate capital back into their business. If you don't trust management to make the right decision, you probably shouldn't the stock.
"Buying yield" is hardly defensive, nor does yield provide support for businesses facing secular challenges (ie drug stocks). Half of the goons who push these mutual funds on TV can't possibly know much more than the dividend yield given that they have 200+ holdings in their fund. Risk is not knowing what you own.
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Oh great, next you will tell me that Cramer is an asshat. Oh......wait..... he is
Dividend stocks are NOT stupid for investors, especially those who do not have the knowledge to "play volatility" and who do not have "inside" information.
One can argue the most stupid thing one can do is put your money on a stock and depend on the crooked casino managers to allow the free market to price it. Never happens.
Yeah, buying dividend stocks with a weak balance sheet seems stupid.
However buying dividend stocks with a strong balance sheet and WRITING COVERED CALLS gets more yield than junk bonds with litte interest rate risk.
I was nearing retirement in2008 and bought a sizable posititon in Pfe and added to it every quarter .I bought it for the div which they cut shortly afterward however i stayed with my plan and kept buying every quarter after 4 years I have $2.64 in div per shares plus over 2 1/2 points profit on 18K shares ...it has been a wild ride I must confess ..but buying div has paid off
Dividend stocks are the next bubble.
Pull up a chart of the Southern Company or Con Edison....
Corn what is going to cause that bubble to burst? These companies (generally) produce or create resources that people need and pay dividends to investors who need income. I agree that they have run up a lot but it actually seems like somewhat of a safe haven as opposed to treasuries.
* deleted - somehow this message got doubled *
Putting aside for a moment all the funny-mental hype about dividend stocks - if I hold a dividend-paying stock overnight into the morning of the ex-div date, I will see a gap down in the price of the stock corresponding to the amount of the dividend. By holding and receiving the dividend, I am betting that the price will recover soon from the ex-div drop. In a downtrending market, the price may not recover for quite some time. If the price of the dividend paying stock does not recover from the ex-div drop within a reasonable time, then I have effectively sold a portion of my stock without surrendering shares. Dividend-paying stocks are fine when the share price is moving higher, but then, aren't all stocks that way? They may give better performance during certain market phases when people are rushing into them for perceived safety, but I would not be too enamored with them.
I had high hopes when I read the headline I was going to have my brain stimulated by a neat take on something. Oh well... looks like a high school finance homework paper
Oh snap!
anyone who argues against the value of dividends as a securityholder obviously has not read 'the bible' Security Analysis by Graham & Dodd.
http://www.amazon.com/Security-Analysis-Principles-Benjamin-Graham/dp/007141228X/ref=sr_1_3?ie=UTF8&qid=1324371237&sr=8-3
I.e. retained earnings has its place, but for gods sake, companies do go out of business and the idea is that if the company cannot make more gains by using its retained earnings then bloody give them to the shareholders!
Note - it also says that just paying dividends to support the price of a security is something to be wary of, and this occurred back in the depression.
anyone who says a div doesnt put a floor on vol is an idiot including the op.
true - and it takes a lot of ignorance regarding overwhelming empirical evidence to "argue" that way. Alas, it is no argument in this lousy article anyway - just postulating crap.
The point of the article is tha dividend yield is not the end all and be all of buying a stock. One of the problems these days is getting good data about a company so that you can make a sound fundamental analysis. Companies have always treated the truth lightly in their prospectuses but these days......In ye olde days more than a few investors loaded up on dividend stocks and then got burned on their taxes because the dividends put them into a higher bracket.
It is quite wonderful how twenty years of anti dividend brainwashing is effective. The whole point of a company is to earn money for its shareholders, which means paying dividends which they can choose to do what they wish with.
If you are lucky enough to find a good company, but it chooses not to pay a dividend, the only way to benefit from it is to sell it, as it is difficult to eat an unrealised capital gain. Very clever. You then have cash and no investment.
Or manage,ment might say: We will "return money to shareholders" with a buyback programme. Management of all high tech companies will love this sort of stupid article. Which is why people like M. Chambers of Cisco, for instance, is a cash billionaire, while shareholders who have held on to this , very successful company have been thouroughly buggered. A share buyback gives money to those who do NOT want to be shareholders. In the first rank are managers who have been given buckets of cheap options. If the resulting shres were not sold back to the company, idiot analysts might spot that the standard shareholder is being diluted out of sight. A dividend returns money to shareholders.
Thanks for your concise statement of what annoys me to the point of just dumping them all. Cisco, how about the ultra turd ORCL? Who buys that junk?
There's a lot more to dividend income investing than just buying yield. You buy stable dividends, companies with a history of raising them, with a history of earning them. You buy healthy balance sheets, in mature markets. It takes actual fundamental analysis, not simply running a yield screen. The stocks you buy might go down. Duh. You're buying stocks. How is this different from any other long strategy?
Moreover, if you ever find yourself having a difficult time deciding between buying shares of some mo-mo growth beast like Apple or shares of a utility stock, your portfolio strategy is confused to begin with.
This isn't to say now is a good time to start buying yield. I don't think it is. But what do I know. I predicted long US govvies would be the worst investments of 2011. Hey, not my fault, my model said so!
An author who writes disparagingly about dividend growth stocks and fails to understand or discuss the most basic concept of yield on cost provides very little information to readers. So, here's the scoop on why income investors buy dividend growth stocks-inflation protection on income (just like owning gold or RE). The idea is simple, i buy 100 shares of a compary, say PM, which currently yields, say 4%. If the market crashes in the value of PM drops by 50%, my yield, or dividend income stays the same (just depends on the number of shares I own). I don't care because my income stream is steady. Now over the years (the last 50 I think), PM increases the dividend by say 5%/year (above inflation). If I never buy another share, after say 20 years, my yield on orginal cost is likely well above 12%. Of course, if people ever give up smoking, PMs business model fails and they can't pay the dividend. But otherwise, you have a "store of value" of a different kind from gold or RE.
If you're young - a company that retains earnings for growth is fine. If you're retired, you've saved, and now you cannot get a CD that yields 1.5%, you have a problem. You need income from savings. I recommended my father hold Microsoft & J&J. He doesn't need growth. He needs income that keeps pace with inflation. These company are AAA (real AAA, not sovereign AAA) and they pay decent dividends. There's a place for them in a lot of portfolios.
A utility stock has something that is considered recession proof, that is it sells something everyone needs: electricity, water, or gas. An iPad is a "luxury" item then add the fact that once everyone owns one you would have to come up with another idea to get people to buy your next big thing. It sounds like the author has not heard the story of How Stock Market Works - Monkeys and Goats.
Moral - In the stock markets today, there are good companies that are overpriced and there are worthless companies that are overpriced. If you are going to be a fool and pay absurd prices because you think that a greater fool will appear in the future, make sure you buy a goat and not a monkey.
It's kind of a silly article. Stocks are individual propositions with their own situations and problems and blessings and so forth; if you do your own homework you can certainly find very solid companies poised to appreciate in stock price t hat will continue paying their dividends. If you're negligent, or heaven forbid, buy brokers reccommends; well, what can you say.
Investors are worse off with dividends. The x-dividend date the stock opens at the prior closing minus the dividend (all other things being equal). But now a taxable event has happened. So they have stock at the x-dividend price, the cash, and a tax liability. Worse off.
You didn't mention that the money moves out of the stock, dropping the price instantly.
Stocks are shit. Bonds are shit. It's all shit.
"First of all, the trade is over."
I'm for that .. So when can we stick a fork in it?
After Bernanke gets his fork out of it.
Why would you even want to own these shit corporations- they're all shit.
Very weak, but the author may have a point about dividend stocks in being overbought.
Having to hit a dividend target does impose a certain amount of fiscal disipline on management.
Utilities are not sexy but they seldom fail. For every Apple there are dozens of failed and struggling growth stocks.
Pick a random basket of ten utility stocks and ten growth stocks and see who is a ahead over ten years. I'll wager that all ten utilites will still be in business in ten years, I am not so sure about the growth stocks. Heck apple would likely be a footnote in history if Jobs had not returend.
i own a ton of dividend stocks and it is all about entry point in this market
Haha. Dividend stocks are for loser investors who don't know how to play the market.
Hey look, it's Chesapeake Energy! I can buy their stock and get a dividend. Yeah, but the shares have plummeted almost 15% this year. But hey, there's always the dividend.
But Cramer told me to chase yield? WTF?
While I like dividends, I would be mindful that they can be slowed to a trickle, or omitted completely.
All of this reminds me of an old Frank and Ernest cartoon, in which a financial adviser says to Frank "Your assests were frozen, then liquidated, and now they seem to have evaporated".
Simplistic, but the article is for retail investors, so that's probably good. I've done well with some dividend plays, but I like limited partnerships and have used REITs in the dim past when they were doing well.
The reason the advice in the article is pretty good is that it makes the most important point in stock investing: Your stockbroker is your competitor, not your friend. Do your own research, rather than buy what the stockbroker has been told to unload on you. Often they are simply helping a much larger client distribute stock to retail investors. You and the rest of the suckers are holding the price up while the large client gets out of the position.
What happens after that is random, unless the large client 'knew something'. Then you are doomed. Your stock will be lowered to hold. You notice sell recommendations are almost non-existent. That's because big clients get upset when you talk down their stock. Bad for business and all that.
correct
As you say it's all about timing; and doing your own research. I offer ABB for your due diligence. it will pay it's dividend; it will also appreciate significantly this coming year; target of $24.50; they have a huge web site you can study. they do major, or major to huge, electric power systems, they have rings of patents; they;re the go to guys for your modern transmission line designs; they have plenty of signed contracts; they only thing that drove the stock price down is the market.
their CFO in 2000 brought down their stock price by Writing puts from 35 down to 12. ABB almost went belly up trading down to 2.70. Then the former CEO Barnevic and some other dude received 200 mm parachute and the CFO found a job at Credit Suisse.
Their product and services were at thhat time as good as they are today. It was bad management, especially a bad CFO that brought down good old ABB. Your personal due dilligence is key and never trust an analyst.
Making money is the general idea. Paying dividends is someone showing you how they are going to make you money. Old-fashioned, I know.
http://georgesblogforum.wordpress.com/2011/11/02/the-daily-climb-2/
Hey Georges, how 'bout you save ZH some bandwidth and dump the avatar. Everybody recognizes your link by now, surely. I mean, it's on Every Single Post.
He learned it from your favorite curry flavored stool ORI.
There are lots of companies that pay out high dividend yields (5%+) that have very low PE multiples. In the 90s, I chased growth and tech and it was a brilliant strategy. Then came the 2000 bust and the lost decade. I've been partial to dividend stocks for the last 3 years and its been great. Will it last forever? Of course not. But as long as the S&P is flat, why not get paid? I'm sure the author will also tell me what an idiot I am for buying bonds too.
huzzah lol
If I recall reading somewhere - the normal cycle is that people go into dividends for security... while growth stocks decline. Then when growth stocks are yielding ridiculously dividend stocks would get sold off... but this probably isn't a normal cycle.
I <3 dividends, but in the last last year or more it just got ugly... all these dividend stocks like utilities have been getting pumped higher n higher. It's just a matter of time. Just sit back and relax... wait for people to get scared and dump them yielders.
Good point about management manipulation to make the company seem more attractive.
Funny, some of the very best "investments" of the last ten years pay no dividend at all, nor any (nominal) yields whatsoever. Hooray for barbaric dead metallic investments!
Tradition is a beautiful thing!
Solid company with top management--like FCX--is the sine quo non of solid investing......if they also hand out dividends good. When a company gives out dividends it tell me they don't know what to invest in or how to expand so they spin th emoney off to investors (who usually know even less what to do with it).
Good article.
Sure, let the management keep investing it for you. Just like CSCO which has spent more cash buying back shares that the market cap of today. How much smarter are they really? Just smart enough to know that share buybacks props the share price to keep the management stock options viable.
Now look at EPD for the last 10 years. Distribution increases and increasing market cap and share price. How much worse could it have been?
The point in the article about GOOG is a darned good one. Tremendous cash balance, earnings growth at a good pace, ready to capitalize on the wireless world, killing the competition.