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Historical dividends yields are not future dividend yields

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November 26, 2008 – Comments (13)

I haven't trusted dividend yields for decision making for a while now because I believe squeezed margins are going to squeeze dividends, and I have blogged about it in Loss of Dividend Spending.

Naked Capitalism has a post on loss of dividends that fills in the gaps a wee bit.  What I mean is I stated I didn't have a clue of how big the dividend loss would be, still don't, but that post gives a bit more detail.

I think anyone talking dividend yields and pushing a stock on that basis has put little foresight into analysis, and even less if they project the dividends to increase.

13 Comments – Post Your Own

#1) On November 27, 2008 at 2:44 AM, awallejr (75.54) wrote:

Depends on the companies no?  Sure some pull back, but others are growing. Choose "wisely." 

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#2) On November 27, 2008 at 2:47 AM, DemonDoug (32.20) wrote:

well said.  A lot of people are looking at GE as an income play with an 8% yield, and GE has stated they will maintain their dividend at its current levels throughout 2009.

I don't believe it.  I think GE is in a lot more trouble than the market is pricing in right now.  They obviously aren't as bad as GM or C, but their financial division is going to be a huge drag on profits, I would not be suprised if they have a loss and cut the dividend despite their promise.

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#3) On November 27, 2008 at 3:41 AM, Inept (91.71) wrote:

Do you believe that earnings, growth, dividends, etc. are going to be permanently impaired? If not, I think it's worth distinguishing between the near future and the distant future.

The impairments we're seeing now are precisely what allows us to enter potentially excellent positions at potentially excellent prices. True these positions may not pay off immediately, but the long term capital gains and dividend payments we may realize make sitting on dead money for a while well worth it.

You cannot count on anything in the short term. Why fret over the near future when you can employ a longer-term outlook that allows you to take advantage of the situation instead of retreat from it?

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#4) On November 27, 2008 at 3:58 AM, DemonDoug (32.20) wrote:

Inept, let me put in my 2 cents:

My Blog On the Nikkei

And I quote myself:

"20 years later, the Nikkei is at about half of the level it reached in 1988.  And 18 years later, it's still a good 70% less than it was from the top.

Now, it is unlikely that this will happen to the dow nominally, because the US government has made it a priority to prop up asset prices, whereas the japanese did not do this in the early 1990's.

Just wanted to show everyone that there is no guarantee in any time frame that the stock market always goes up in the long term.  I always get squirrelly around people who use the words "long term" without a definite time frame of x amount of days, months, or years.  Because yes, maybe in 100 years real estate will get back to it's 2005 levels - so it's true, in the long term it may go up.  But in the long term, there is only one true guarantee, and that is that we'll all be dead."

Now, neither deb nor myself or any of the bears are calling for a 20-year stock price deflation.  However, we do recognize that there are significant systemic risks that could lead to an outcome similar to what has happened with the Nikkei.  Or even worse.  Someone else recently posted a blog that showed that the median home price in 1905, adjusted for inflation, would be about $37,000 dollas today.

While you are correct when you say "The impairments we're seeing now are precisely what allows us to enter potentially excellent positions at potentially excellent prices" - this is true only if the impairments are not permanent.  How many "one-time impairments" have been taken over the last year?  Sure, a bad quarter for Citi might give you a lower price to invest in the stock, but do you want to invest in a bank with over a trillion dollars in shadow assets, paying a dividend of one cent per quarter?  This is not investing, this is roulette-style gambling.

I've recently found it easier to find the good companies out there to invest in, but there aren't that many.  

Why fret over the near future when you can employ a longer-term outlook that allows you to take advantage of the situation instead of retreat from it?

Inept, Deb's longer-term outlook (and that of many bears both here on CAPS and in the macroeconomic world) are extremely bearish/gloomy.  The only advantage they recite is to hold cash, treasuries, and/or gold so that you don't lose your shirt in the stock market.  You have to read all of her other blogs, and the words of other bears, but deb has been really ardent about the future of things like pensions and defined benefits for retirees, especially heading into a period of time where baby boomers are retiring.  Looking at it that way, the greying of the workforce, is very similar to Japan and is not bullish, not even on a 20-year timeframe from today.

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#5) On November 27, 2008 at 10:06 AM, rd80 (97.12) wrote:

I would agree that anyone who's making investment decisions based on projecting the dividend stream over the past couple of years or jumping on a high yielding stock without investigating why its yield is so high is making a mistake.

As DemonDoug points out, and as I have painfully learned in my real account, the market is pricing a dividend cut into GE.  Yahoo's quote is still showing a 10+% yield for C even though that dividend is going to one penny as part of the latest bailout.

However, there are a number of stocks where the dividend performance going forward still looks solid.  Some examples: MCD, JNJ, SYY, utility companies, DemonDoug fav MO.  I'd even toss a few of the stronger banks in that group.  Most of these companies haven't fallen to the 'bargain' levels of C, but they have fallen to true bargain levels compared to income investments like long term treasuries.

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#6) On November 27, 2008 at 10:23 PM, abitare (52.36) wrote:

Good post and replies.

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#7) On November 28, 2008 at 3:53 AM, BigFatBEAR (29.24) wrote:

Great thoughts dwot, inept, and demondoug.

I'm a long-term bull (10+ years), but short to medium term bear (1-2 years).

I think the following companies have a great shot at showing capital gains AND dividend growth in the next few years, based on their history and on simple supply and demand: COP, JNJ, BHP. Granted, divs may stall or get cut even from these fine companies if the recession is as deep as many top bears say it will be, but I honestly can't see a 3% savings account outperforming these stocks over 20 years.

Just my 2 cents, I'd be interested to hear any thoughts on them.

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#8) On November 29, 2008 at 7:23 AM, OtherOracleOfOMA (30.98) wrote:

Dwot, will you marry me? I mean, I probably have to get me CAPS score up a bit, but then? I'm just saying, because you seem to be one of the only sane individuals on this entire site...

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#9) On November 30, 2008 at 9:40 PM, Beartracks1 (93.98) wrote:

  Dwot, I've read two of your blogs, ahem,"Im the newby on the block."  They are both extremely negative as far as I'm concerned.  I looked at your portfolio and if you own all that you claim, you're a zillionaire or a mutual fund manager.  I see you're heavily weighted in financials.  If these are older holdings, longer that 3 months I can see why you're not feeling too well about the market.  I'm more of an optimist.  I think you can pick and choose your dividend companies with some measure of faith.  I've made almost every mistake an investor can make because I didn't pay attention.  I'm paying attention now and the landscape looks good to me.  How do you keep track of all the picks you've made?  Just wondering....

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#10) On November 30, 2008 at 10:22 PM, baekeland100 (47.00) wrote:

Good Post and replies, but I seriously doubt that a company such as Pfizer will be cutting their dividends anytime soon.

I also agree with the person a few posts up who listed five or six companies giving dividends; although I would disagree with their pick of T (GE will break their promise, how can they not)? For me JNJ, COKE, PFE, WYETH to name a few dividend giving stocks will not disappoint their shareholders and that is a guarantee up until 2011.  After that not only the stock market but the American way of life is anyone's guess.

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#11) On December 01, 2008 at 12:10 AM, mgiv (97.60) wrote:

in 1985 the yen traded as high (or low depending on perspective) as 260 yen per dollar. It is currently at 95 so it is worth 2.7 times as much now.  If you got in the nikkei in Feb 1985 and held on your really up 80% in USD adjusted terms.  If you got in on the top you deserve to lose.

I think the market will drop 20% from here.  Especially with doubts about citi's future looming and the piles of debt we are in.  We are not out of the rat hole yet.  There has been all of this focus on interest rate resets and recasts but the real killer is the recast due to property tax hikes.  My mother went from an 800 dollar a month payment to 1600 all because she refinanced to get 20,000 of equity.  Then it went to 2100 due to property tax hikes. It's criminal.

I went long early,  this shopping spree is all about having that last horrah before finally defaulting on piles of debt

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#12) On December 01, 2008 at 1:36 AM, giftofgod (98.50) wrote:

I agree with dwot concerning dividends in general, especially for many financial stocks. Great post, dwot.

However, to all of you that believe that GE cannot sustain their dividend I have a few words to say. Their dividends at 8% are less than their earnings at 11.5%. That means it is sustainable long term. If you want to look at near term, look at the cash flow from operations. It is about 4 times the dividend payment each quarter. In other words, the cash flow would have to diminish by 75% in order to diminish their ability to pay a dividend. That is not happening any time soon and GE will continue to pay dividends because they are conservative with that dividend. They simply will not increase it until they are sure they can continue paying.

 

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#13) On December 01, 2008 at 1:32 PM, OklaBoston (67.85) wrote:

Ever heard of Morningstar.com? They give grades from A to F in three different categories for a very high percentage of public co.s. If they give a co. an "A" for "Financial Health" I'd say it's a pretty good be that that co. will be able to maintain, or even increase, it's dividend over the next four quarters. On the other hand, if they give a co. a "D" or worse in that category, there's a very high risk that the outfit will have to cut or suspend it's dividend soon. Such a co. miht even have to file for bankruptcy soon, so being bullish on it because the yield is fat seems like a sucker bet to me.

PS: I am not employed by Morningstar.com, or have any ownership interest in it. I just think it's something more people should know about.

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