Wednesday, March 30, 2011
My viewpoint on dividends is not the traditional one. While there are many reasons given for buying dividend paying stocks, few look at the opposing point of view. Mine is not the popular viewpoint, so at the risk of sounding like I don't know what I am talking about, I ask you to consider what I am about to say.
Getting Paid To Wait
The classic reason for buying dividend paying stocks is because you get paid to wait. For a less than apples to apples comparison, I suggest we look to the rental income market. Should we insist on keeping renters who are paying the rent, but who destroy the premises in the mean time? I think most landlords would not want to continue their relationship with renters who are costing them money. Yet, when it comes to investing, we are expected to waste capital in the event the stock price goes lower in order to gain income.
No worries, they say, "Dividend paying stocks lose less than other types of stocks in a downturn!" Our single largest advantage over the pro's is our ability to move quickly. Why would I want to hold any stock that is losing money? In selling, the worst case is we buy it back later at the price we sold it, but normally we can buy it again at a lower price which would more than make up for any dividend. As for losing less, dividend paying stocks also make us less, because they have to pay the dividend. It is like a tax on our profits.
Return of Capital
Speaking of tax, I know there are many, many people who delight in receiving a tax refund. While it feels good, all it really means is we paid too much in the first place! Meanwhile, the government has been using our money until we later prove to them it actually belongs to us. I look at dividends as a return of capital - money we paid to get the stock in the first place. Why is it we are happy to get our own money back? If
we hadn't "overpaid" for the stock to get the dividend in the first place, we could have purchased more stock!
Of course, dividend paying stocks outperform in the long run, but only in a buy and hold portfolio! As I have said before, nothing says we need to hold stocks that cost us money, or under perform other stocks. My preference is to buy stocks at a low price and sell them at a higher price. The fact that dividend paying stocks don`t drop as much as others means it is more difficult to buy them at a low price relative to other stocks. When the market corrects, I want stocks to drop as low as they will go, so I can buy them at a real discount!
I`m not just poking fun, here, either. I no more consider the dividend yield of a stock I am buying than I count the number of members on the board of directors. I neither buy a stock because it pays a dividend, nor discount the ones that don`t. That doesn`t mean that others shouldn`t consider dividend yields, but I am not in favour of the buy and hold approach.
I`m curious about other people`s approach regarding dividend paying stocks. What do you do?