Wednesday, November 5, 2008

A Feeble Attack On Dividend Growth Investors

It is always beneficial as investors to try to see the whole picture, and similarly it's always healthy to understand the counterpoints to a strategy. While I'm sure the following post does not describe every dividend growth investor, it is an interesting take against the investment style. The post was written by a known sh#t disturber named Nelson at "No Communism", who apparently still lives with his Mom. Enjoy....

In what's bound to become a regular staple here at No Communism (the blog that hates Commies so much!) I'm going to piss off some of my fellow personal finance bloggers. If you remember before, I shat on blunt money and money ning about budgets and how I thought they were a waste of time. It led to the most amount of comments ever, which is any number that's more than 1. Naturally I was pretty excited about that.So, since my only success as a blogger came from making fun of someone else's hard work, I figured I'd jump right back on that gravy train.

Am I the only one who hates those dividend growth investors? They're always writing posts about how some company out there raised their dividend a measly 3 cents a share, and how that translates into 6 extra bucks a quarter. And if you reinvest that 6 bucks a quarter (using their favorite thing ever- a dividend re-investment plan, or DRIP) you could end up with $46.27 extra to retire with.They always make it seem like some sort of giant accomplishment when their precious dividends get increased. Microsoft increased their dividend 3 cents a share? Score! Stock was down 60 cents because of whatever? Who cares!

Now that I've (hopefully) succeeded in pissing off some of these investors, I'll give them some due. Dividend growth investing is an interesting hybrid of value and growth investing. They buy a name because it represents both reasonable value (hence the dividend in the first place) and growth. (earnings are increasing enough to justify dividend increases) Over time, dividend increases can represent a very attractive yield on the original investment.That is, if they get it right.You don't have to look any further than today's stock market to see the weakness in dividend growth investing. Financial institutions are cutting their quarterly payments faster than hot single girls hang up when I call. Once the dividend gets cut, the stock gets absolutely hammered. (Bank of America, come on down!) At that point, all those dividend increases don't matter much, do they?What happens when a dividend is cut? According to dividend growth investors, it should be banished to some sort of special depth in the abyss of hell, to hopefully be never seen again. It should never be discussed as a serious investment again, all because it committed the unforgivable sin of cutting it's periodic payout to investors. You certainly shouldn't even think about buying at that point, and if you own units of the unlucky company, you'd be best to shed them.

Is this really a good strategy? If you would have followed this mantra blindly, you would have missed out on some of the best investment opportunities out there.In 2002, Telus slashed their dividend to help the company deal with a cripplingly large debt load. The company currently trades at 7 times their 2002 lows of $5, and even hit above $60 in 2007.In 2000, Transcanada Pipelines slashed their dividend because of many things, including weak commodity markets and a sizable debt load. The company touched $10 before rebounding to touch $40 by 2007.I can go on. I bought General Motors for an average of $22 (ish) in 2006. The company cut it's dividend to $1 from $2, and had all sorts of problems. I managed to sell my position last year when shares of the automaker touched above $40. GM has shit the bed since then, but I still made money.

Dividend growth investors buy a stock, then hold forever, hoping the dividend grows perpetually. A lot of them actually do a decent job of timing the market when they initiate a position. They do their research, then pull the trigger when the dividend is the highest.of course, when the dividend is the highest, the share price is lowest. How much of their decent market timing can be attributed to skill and how much can be attributed to pure dividend greed is debatable, but there's no doubt the dividend yield plays a very important factor.

I've yet to see a dividend growth investor have a decent exit strategy. Will he sell when a stock hits a certain price level? Or when the yield drops below a certain percentage?Nope. He buys and holds forever, hoping for his yearly raises.A company like General Electric (a DGI favorite for a long time, until fairly recently) has done a great job of growing their dividend over time. But what about now? The company keeps the dividend steady, and these guys bitch about it.Let me get this straight. A company that has a large financial services arm and makes a wide variety of industrial products announces during terrible economic times that it is keeping its dividend steady. You might think this is a prudent thing to do, given the conditions in the market. Instead, there's people out there who want to fire the CEO. I just don't get it.

One last thought, then I have to eat my mom's delicious home cooking. As investors, we should all love dividends. Nothing beats getting paid to own a stock. And as a contrarian, I'm often looking at stocks when the dividend yield is highest. Saying that, they aren't the only way to make money in the markets. Capital gains are nice too. Maybe all you dividend guys should sell once a company's stock is on fire.


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8 comments:

  1. I remember the first time I read this I had a good laught just "knowing" that someone was going to pick up on this and give him some publicity. It worked - so it just goes to show you how popular the other side of an argument can be when us dividend addicts concentrate on the sunny side.

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  2. I think it is a good exercise to consider his points and any others that might go against a strategy or path taken.

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  3. It's an interesting article no doubt about it.
    But it doesn't do investors any good since it misses some important points such as:

    1, Diversification is important. Just because I liked GE a lot doesn't mean I has all my portfolio in GE shares. That's why the cuts and freezes in the financial sector have not affected my dividend income a lot.

    2. In the long term dividend payers outperform non dividend payers. Of all the dividend payers dividend growers or initiators outperform dividend freezers, cutters or eliminators. GM is a bad example for dividend growth investors as it has never been a dividend achiever in its 100 year history.

    3. You could always pick a stock to prove a point. Sure telus did cut its payment. ED also cut its payment in 1970's only to emerge as one of the dividend aristocrats 30 years later. But on average if you keep buying stocks that cut their payments you will lose money. Even AAPL eliminated their div's in the mid 1990's and the stock was a terrible investment for the next 3-4 years.

    4. Dividend Growth Investors buy when the stock appears cheap, the dividend is growing and the yield is attractive, and the dividned is well covered. They don't chase highest yields, and they don't time the market. They do sell after a dividend is cut or after their stocks are acquired by competitors and then move on.

    The NC guy tells us he bought GM and then sold it presumably at a profit. He doesn't let us know why he bought it and then why he sold it in the 40s?

    Anyways I would really hope that there are more people who do not believe in buy and hold, dividend and other sound and proven forms of investing.
    Over the long run few people make money in the stock market. I hope to be one of the minority.

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  4. What No Commie fails to understand is the compounding effect of rising dividends and dividend reinvestment. His example of a 3 cent a quarter dividend increase reinvested equating to retiring with an $46.27 understates the effect just a tad.

    One of his other points--the risk of a company cutting or suspending its dividend--is fairly easy to combat. The antidote: Only invest in truly high quality companies.

    What if we were only allowed to invest in no more than 3-5 different companies? What if we approached the stock market the same way we approached starting our own business? Wouldn't we be much more selective and demanding?

    Would we ever end up owning stocks like GM?

    I'd take my chances with a long term concentrated portfolio of high quality companies over the diversified mediocrity of an ETF or index fund any day.

    Thanks for posting . . .

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  5. If I had to pick only 5 stocks. JNJ, PG, MCD, PEP, MO.. Or pick just SDY and forget about stocks..

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  6. My five stocks:

    General Electric
    Johnson & Johnson
    Procter & Gamble
    Toronto Dominion Bank
    Manulife Financial

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  7. I can't believe you guys actually posted this. Good for you to have the balls.

    I got some nice traffic, (100 page views in one day! A record) so I thank you guys for that.

    I responded to some of the comments in my latest entry. Check it out.

    http://nocommunism.blogspot.com/2008/11/div-net-hates-me-nice.html

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  8. Thank you Nelson. It really took a lot of courage. I agonized over it for weeks...

    Glad I increased your traffic as well. I'm sure everyone was fascinated by your post about how they didn't fill your Dairy Queen Blizzard up all the way to the top.

    I see you're not satisfied with the link within the article since you had to paste another link in the comments section above. By the way, there is nothing wrong with still living with your Mom, I think it's admirable.

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