an article to
-
Font Size:
-
Print
- TweetThis
Some investors lack the patience to buy a stock, hold it for one year and then receive a 3%-5% dividend by the end of the year. They believe that in the stock market one could easily make 3%-5% every day by trading volatile stocks such as US Bancorp (USB), Citigroup (C), or Bank of America (BAC) instead.
Such comments assume that investors have a strategy where they could consistently buy low and sell high for a large profit. Based on numerous studies of individual investors, mutual funds and active managers in general, it seems that over 85% of active traders not only under perform the S&P 500, but also lose a significant amount of money in the process. Substituting investing in the stock market for gambling at Las Vegas is often a get poor quick strategy. This could lead to complete denial of stock market investing as a whole, and failing to reach one’s financial goals.
If you bought a diversified portfolio of at least 30 income-producing stocks from different sectors, chances are your returns would be somewhat closer to the market. Chances are that you won’t have picked all 30 of the next WorldCom, Enron or AIG. Thus in order for you to lose all of your principal and dividend income with a buy and hold strategy would be pretty impossible to do. If you however try to buy and sell stocks every day in order to capture huge potential profits, the probability of you compounding your losses faster and faster until you run out of money is very large.
If you thought forecasting day-to-day fluctuations in the stock market are hard to predict, then try predicting the annual changes in the stock market averages. We are all being told that on average the stock market goes up by 10% every year. It is true that over the past century the S&P 500 and the Dow Industrials have achieved a total return of somewhat close to 10% on average per year over large periods of time.
Annual total returns are the sum of annual price appreciation and the yearly dividend yield. When stock markets are booming, investors tend to forget that stocks represent right to ownership of real companies, and instead treat them like lottery tickets. During bull markets all investors care about is finding a greater fool to bid their stocks higher, while completely ignoring fundamentals. During bear markets however investors get timely reassurance from their stocks in the form of dividends, which lower investment losses. While capital gains could quickly evaporate and turn into losses, dividends are real cash that is deposited to your brokerage account. Investors could then decide how they plan to allocate it best for their individual needs.
While it is difficult to predict stock prices due to their volatility, until recently dividends have been much less volatile, and thus easier to rely on in both good and bad times. This makes dividends particularly beneficial for individuals who are planning to retire and live off their dividends. Reinvested dividends magnify total returns and deliver even faster compounding of dividend income. Reinvested dividends are believed to have accounted for 97% of S&P 500 total returns since 1871.
Another important characteristic of dividends is that they could grow over time. Dividend Growth has exceeded inflation by 2% annually over the past 85 years. While the quarterly dividend per share in the S&P 500 was $1.05 in early 1977, it has risen to over $7 by 2008.
Despite the bad press that dividends have received lately, there are many companies, which stay loyal to their shareholders by raising their dividends. Examples of companies, which have increased their dividends for more than 25 consecutive years and have kept growing payments even during the current credit crisis include:
Coca Cola (KO), which manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide has rewarded its shareholders with regular dividend increases for 47 consecutive years. Dividends have increased by an average of 9.00% annually since 1999. The stock currently yields 3.60%. Check Brad's analysis of Coca Cola (KO).
Wal-Mart Stores (WMT), which operates the largest chain of retail stores in various formats worldwide, has boosted dividends for 35 consecutive years. Dividend payments have increased by an average of 16.50% annually over the past ten years. The company currently yields 2.30%. Check my analysis of Wal-Mart Stores (WMT).
Exxon Mobil Corporation (XOM), which engages in the exploration, production, transportation, and sale of crude oil and natural gas, has rewarded shareholders with a dividend raise for 27 consecutive years. Dividends have increased by an average of 7% annually since 1999. This oil company currently yields 2.40% . Check my recent analysis of Exxon Mobil (XOM).
Abbott Laboratories (ABT), which manufactures and sells health care products worldwide, has raised dividends for 37 consecutive years. Annual dividends have increased by an average of 8.80% annually over the past decade. The stock currently yields 3.70%. Check my analysis of Abbott Laboratories.
AT&T (T), which provides communication services in the USA and internationally, has increased its dividends for 25 consecutive years. Annual dividend payments have increased by an average of 5.70% annually since 1999. The stock currently yields 6.60%. Check my analysis of AT&T (T).
By creating a diversified income portfolio through dollar cost averaging and by reinvesting dividends, investors are more likely than not to achieve long-term sustainable success in the market.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
Top
StockTalkers.-
1
David Fry
-
2
Cliff Wachtel
-
3
Mike Havrilla
-
4
David White
-
5
Hedged In
Top StockTalkers » -
1
And all these people who are pushing their own Investing style, they always seem to use historical numbers based on hypothetical investments beginning with, "If you had Invested X amount in Year Y, you would have made Z%...."
They never offer up the success or failure of their own Investment experience.
So, I'll share mine: During the last 4 years I've been Investing, I've tried Long-Term, Short-Term, & even DayTrading (for 1 month). I made money on all 3 styles, posting a gain every year from 2006 (# of Trades):
25% (10), 8% (2), 7% (1), and 15% (37) for 2009.
Personally, I prefer Short-term (days, weeks to months). Obviously, if the stock is performing well, I'll hold it Longer. And I never buy any stock that I'm not willing to go Long, so it has to have Value or Growth, & good Fundamentals.
My point is, you can benefit from examining & adopting aspects of the other styles, and it might make you a better Investor-Trader.
Short-term Traders can benefit from holding some positions longer than they're used to, while Long-term Investors can benefit from more Management & Risk Control, like having mental Stops in place to avoid -30% losses like most people in 2008.
Find a style that works for you, & the only way to do that is if you're Open-minded & Flexible.
As I invested a litttle in the market, I came up with my own conclusion that quality dividend, rather than sell-buyer-agreed market cap, is the true reflection of intrinsic value of a company. Through dividend reinvestment, we get a portion of intrinsic value realized from a company, reinvest it back to the company and get it back again. This continuous circulation of intrinsic value between an investor and a company appears to create something more than simple compounding.
After a few mistakes, I decided to stick to quality-dividend company and divident reinvestment.
By BRENT KENDALL
WASHINGTON -- A federal appeals court Friday upheld major points of a landmark ruling that said the tobacco industry violated federal racketeering laws in a scheme to deceive the public about the dangers of smoking.
A three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit rejected, however, the Justice Department's request for additional penalties against cigarette makers, including a proposal that the tobacco industry fund a $10 billion national smoking-cessation campaign.
Defendants in the case included Altria Group Inc.'s Philip Morris subsidiary, Reynolds American Inc., British American Tobacco PLC and Lorillard Inc.
Murray Garnick, an Altria senior vice president, said the company disagreed with the ruling and would appeal. Altria could first ask for a review of the case by the entire D.C. appeals court.
Spokesmen for the other companies could not immediately be reached for a comment.
In a unanimous 92-page ruling, the court said Friday there was ample evidence to conclude the tobacco industry intentionally deceived the public about the harmful and addictive effects of cigarette smoking.
The court affirmed most of the remedies imposed against tobacco companies in 2006 by U.S. District Court Judge Gladys Kessler following a nine-month trial, including a ban on promoting brands as "light" or "low tar." Judge Kessler's ruling also required the industry to make corrective public statements about the health effects and addictiveness of smoking.
"[T]he court's conclusions are not supported by the law or the evidence presented at trial, and we believe the exceptional importance of these issues justifies further review," Altria's Mr. Garnick said.
The case dates back to 1999, when the Clinton administration filed a federal racketeering lawsuit against nine tobacco companies and two trade associations, alleging they had engaged in a 50-year conspiracy to deceive the public about the dangers of smoking.
The court on Friday said the tobacco companies "knew about the negative health consequences of smoking, the addictiveness and manipulation of nicotine, the harmfulness of secondhand smoke, and the concept of smoker compensation, which makes light cigarettes no less harmful than regular cigarettes and possibly more."
The court further said the government had adequately proved that the tobacco industry was likely to commit future racketeering violations unless restrictions were imposed. But it also affirmed an earlier ruling that the government could not force the industry to forfeit as much as $280 billion in profits.
Matthew Myers, president of the Campaign for Tobacco-Free Kids, said the ruling was a "tremendous victory for public health," but that the court's refusal to allow additional remedies was disappointing. "It means that there's much more that needs to be done to counter decades of wrongful behavior by the tobacco industry," he said.
A Justice Department spokesman said government lawyers were reviewing the decision.
On May 22 01:00 PM tshk1221 wrote:
> This is a great article that illustrates one of the best ways for
> small investors to accumulate wealth over long-term through dividend
> reinvestment.
>
> As I invested a litttle in the market, I came up with my own conclusion
> that quality dividend, rather than sell-buyer-agreed market cap,
> is the true reflection of intrinsic value of a company. Through dividend
> reinvestment, we get a portion of intrinsic value realized from a
> company, reinvest it back to the company and get it back again. This
> continuous circulation of intrinsic value between an investor and
> a company appears to create something more than simple compounding.
>
>
> After a few mistakes, I decided to stick to quality-dividend company
> and divident reinvestment.
"Based on numerous studies of individual investors, mutual funds and active managers in general, it seems that over 85% of active traders not only under perform the S&P 500, but also lose a significant amount of money in the process."
Seems kind of odd because every transaction has a buyer and a seller. When 85% of active traders under perform S&P average doesn't this means that some one on the other end of those trades made a profit (and its unlikely to be value investors because they dont trade much as compared to active traders). May be the rest of the 15% made profit equal to combined losses of the 85%. That is the incentive for active trading!
Generally speaking:
active trading= higher volatility in prices + high effect of luck
=higher profits but not across the table
longterm investing = lesser effect of luck
=return in keeping with the market average.
if one wants to match the S&P 500 return there many ways of doing it.. but there are investors who want more.
"During bull markets all investors care about is finding a greater fool to bid their stocks higher, while completely ignoring fundamentals. During bear markets however investors get timely reassurance from their stocks in the form of dividends, which lower investment losses. While capital gains could quickly evaporate and turn into losses, dividends are real cash that is deposited to your brokerage account. Investors could then decide how they plan to allocate it best for their individual needs."
boom= more bull markets = higher expectation of future returns
recession = more bear market = more weight age to the returns in hand
so dividends giving companies maintain their price (more than others) in recession. which is the whole point really.
To make money via capital appreciation, you must sell those shares for more than you paid. If you do that raidly, it's usually called "trading." If you tend to hold on to your stocks for a "long time" (whatever that might mean), you're said to be "investing." The key point, though, is you must sell the shares to make money. Anything that happens before that is just "on paper." No gain or loss is permanent until you sell the shares.
In contrast, to make money via dividends, you do not need to sell the shares. Your mind-set is different: You own a piece of a profitable company, and each month or quarter, the company gives you a return on your investment by sending you a dividend. Well-chosen dividend stocks need rarely be sold. Any capital gain or loss is just on paper until you sell.
So the dividend investor tends to view stocks differently. I have several positions in wonderful dividend-paying companies on which I have paper losses of 25% at the moment. And I don't care...because the businesses are sound, they keep sending those dividend checks, and they keep increasing their dividends. It's like owning a small business. As the owner, you profit from the business by extracting some profits each year as dividends. (Those of you who read "The Millionaire Next Door" will recognize this analogy.)
Eventually, of course, I want the capital value of my stocks to return to or surpass the amount I paid for them. But I'm in no hurry, the important thing to me at the moment is the reliability and steady growth of the dividend streams. As long as that continues, I won't sell them, so their current market price is not relevant. This is the opposite of course, of someone following a capital-appreciation strategy, to whom price is everything.
On May 23 08:22 PM EttU wrote:
> A dividend in hand is worth several "maybe stock increases" in the
> bush. Cash in hand is worth much more than promises by greedy executives
> and incompetent analyst.
>
Day traders will swing trade positions and look for large gains in as short a time as possible. Why not make 10% in a week or two rather than wait a whole year?
Some people like risk, some people like to buy penny mining stocks and wait for the big strike.
We all understand that buy and hold for years will pay in the long term, but some of us like a challenge and to have some fun along the way.
It's horses for courses.
Few companies can produce dividends that will match inflation over the coming decade. Negative overall graowth could be a strategy, but it's not a strategy for making money.
On May 23 11:20 AM notsosmart wrote:
> dont be fooled by the new wall st mantra-trade,trade,tra... cant
> sell their phony rated AAA to the world anymore so the say buy &
> hold is dead.buy & hold good div paying cos,join their drip plans
> &; you will do great.
Right on... I have in a filing cabinet behind me the DSPP prospectuses (prospecti?) to 118 companies. Many direct stock purchase plans fit my style of investing perfectly and even allow me to hold fractional shares AND elect to receive all dividends instead og reinvesting them.
AT&T's network? Gasp!
Pardon the preaching to the choir.
During the past year, the productivity (dividends) of my stocks have increased, even as the price per share went down. Just as with the farm, the real value is in the crop (dividend), not the current price of the land (stock).
On May 27 09:37 AM Graybeard44 wrote:
> I used to own a share of our family farm. Whether we could sell the
> land for $50.00 per acre or $5000.00 per acre, the productive capacity
> of the land remained the same. When we solod the farm, I invested
> my share in dividend-paying stocks. Now, my income is higher, with
> less fluctuation, and a WHOLE lot less work.
>
> During the past year, the productivity (dividends) of my stocks have
> increased, even as the price per share went down. Just as with the
> farm, the real value is in the crop (dividend), not the current price
> of the land (stock).