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Going out with both guns blazing / Why I love dividends

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October 30, 2008 – Comments (7)

 

Do I think that stocks have hit a bottom and will do nothing but go up from now on?  No. I think that it is entirely possible that we are experiencing a relief rally now that the credit markets have started to show slight signs of thawing and that stocks will start to swoon again once people realize that we are in for a tough recession and the resulting earnings, or lack there of in many cases, begin to come out.

Having said this, I have been steadily purchasing shares of companies that have tremendous dividend yields (that I believe are fairly safe) over the past two months...with the exception of after the two huge up days that we had.  Why am I buying if I'm not sure if this is a bottom?  Because no one knows for certain when we will reach one.  I can guarantee you this though, many stocks are crazy cheap right now.  They are pricing in Armageddon and while I believe that we are in a recession, possibly even a bad one, I have said before and I will say again...this is not the Great Depression.  Even if it is, I'm going to go out with both guns blazing. 

I'm not going to sit here cowering in fear like a whus and not purchase anything after a 50% drop.  No I'm not dipping into margin to buy stocks, just ask many CEOs how dangerous that is, but I am putting every available penny that I can safely spare into the market and I will continue to do so over the next year.  I can virtually guarantee you that people who buy stocks today will be better off than those who sell stocks today 5 years from now.

Flash back to the worst time for the markets in my lifetime, 1974 (I was very young, but I was alive then).  Now that must have been a scary time for investors.  It was the worst bear market since World War II.  By October of that year, the S&P 500 had fallen 48% from its high two years earlier (sound familiar).  Investors who purchased stocks at the end of that year were richly rewarded.  By the end of 1984, that investor would have reaped a total return, including dividends, of 298%. By the end of 1994, that investor's total return would have been 1423%.

Is the economy going to be in rough shape for the next year?  You bet it will.  However, stocks will begin to turn around several months before the recession is over.  Has my buying spree started six months early, a year early?  Perhaps?  Do I care?  No.  I will continue to save money by spending less than I make (novel concept I know) and I will continue to buy stocks over the next year.  This too shall pass and when it does, you will be glad that you didn't just run away.  I know it is tough to do this after seeing such massive losses in your portfolio, but selling and cowering in fear guarantees those losses investing more money will eventually eliminate them.

So why am I focusing on stocks that pay safe (that's why you look at things like payout ratios) crazy dividends ?

Long-term multiple contraction, which is a distinct possibility, does not impact dividends. 

I don't know for certain if we will ever, not for a long time anyhow, see stocks trading at the earnings multiples that we have seen over the past several years.  If the markets do experience a prolonged period of margin contraction caused by lingering fear, Baby Boomers slowly draining their retirement accounts, reduced leverage n the part of investment banks and hedge funds, or whatever for the most part dividends will be unaffected.  As long as companies continue to earn, their dividends will be safe, but their stock prices will never climb to the levels that many people assume they will using recent history as a guide.

Four ways to buy and hold

Deej

7 Comments – Post Your Own

#1) On October 30, 2008 at 1:00 PM, LORDZPAIN wrote:

Buy and hold does no work !!!!!!!!!!!!!!!!

As long as anything is good is a big as if

 

What good is a few pennies in a dividend when you lose several if not tens, twenty, or more in the share price...

you have to declare that dividend, but you cant deduct the loss in unrealized value....

But hey its your money....

 

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#2) On October 30, 2008 at 1:32 PM, Gemini846 (57.62) wrote:

The article he quoted discussed for instance the DVY which now trades at $45 and a 5% yeild $2.25 per year. Now lets suppose the stock halves over the next year, sure he'd down to $23 but he's still collecting his $2.25 (minus taxes compoundable). If the stock NEVER recovers and he holds it 10 years his investment is worth $58.85/share. Another 10 years? $151/share. What's the odds that index fund will not recover sometime in the 20 years? I'd say pretty low don't you think.

Worried about taxes? Put it in a Roth. Even paying 35% taxes on his dividends he's at $110 per share. In fact the longer he holds this thing before it pops the better off he's going to be because his dividends buy more shares.

 

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#3) On October 30, 2008 at 2:56 PM, TMFDeej (99.41) wrote:

Hmmmm, change your name LordZ?  How strange, a negative comment coming from you. 

The "few pennies" in dividends that you are talking about amounts to anywhere from 5% to 20% for the companies that I am looking at.  Even if we enter a monsterous recession, the prices of these companies will eventually return to the level that they are at today, and probably eventually much higher.  I'll gladly hang out for five years collecting a 10% dividend while you try to day trade this market.

Deej

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#4) On October 30, 2008 at 5:21 PM, leohaas (32.74) wrote:

Excellent plan. Just one question: is the dividend sustainable? How do you know?

That is an important one, because typically stocks of companies that lower their dividend get pummeled!

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#5) On October 30, 2008 at 11:11 PM, lenri (71.95) wrote:

I don't think you ever can know if a dividend is sustainable. You must do your own evaluation by studying the history of a particular stock and then play the odds. Maybe see if they lowered divs in the last recessions. I don't think GE has ever lowered its dividend but then again where is Jack Welch when you really need him? I intend to do the same thing as Deej and hope for the best.

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#6) On October 31, 2008 at 7:30 AM, TMFDeej (99.41) wrote:

Lenri is right.  No one ever knows for certain if a dividend is sustainable.  All anyone who is looking to invest in dividend stocks can do is look at the payout ratio and pick companies that have large cushions.  I would never buy a high yielding company for the dividend if it was already paying out as much as it could.

Look at companies' cash flow and payout ratios, make sure that they can easily cover their current dividend and run some scenarios to see what would happen if the company's earnings dropped some.  In fact, many companies run scenarios in their investor presentations that show what would happen to their cash flow or dividends if certain future scenarios unfold.

Many of the pipeline and natural gas / oil companies do this, using different prices for the underlying commodities that they deal with.

One can also look at the historical dividend payments for companies to see how stable they are.  This information is available on Yahoo!

Deej 

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#7) On October 31, 2008 at 10:22 AM, GS751 (27.36) wrote:

Insint it Peter Lynch who said "A good company usually increases its dividend every year"  LordZ, have fun day trading.  I am doing some options trading but it is less than 10% of portfolio.  I'm not a huge value guy but I like ur take Deej...  What about long term USD risk though.  Over like a 5 year period.

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