Is There A Misplaced Mania Over Dividend-Paying Stocks?

|
 |  Includes: AA, AAPL, AFL, AVP, F, GMCR, HAS, KMB, KO, NFLX, PG
by: David Crosetti

In a recent article, The Misplaced Mania Over Dividend-Paying Stocks, author Arnold Landy says:

“The proper way to view most stocks’ rate of return is to look at total return. And it is irrelevant, except for personal income tax implications, how much of that total return comes from dividends versus stock price gains.”

Landy goes further by saying:

“Payment of cash dividends has no effect on investors’ total return because each dividend payment reduces the value of a company’s stock by an equal amount.”

Finally, with all the characteristic aplomb of the non-dividend investor, Landy throws out this particular gem:

“With the exception of avoiding very high dividend paying stocks, I continue to view the dividend paying policies of most stocks with indifference. For those who see the payment of dividends as an enhancement to a stock’s price, I wonder why such investors do not focus on non-dividend paying companies, such as Apple (NASDAQ:AAPL), so as to capture any such premium before it is built into the stock price, rather than afterward, when the premium has already provided its benefit to investors.”

Mr. Landy makes some bold assumptions. It would appear that Mr. Landy feels that dividend investing is at best an overrated strategy. It would seem, however that every critic of dividend investing follows much the same line of reasoning.

1. Dividend investors are unable to grasp the importance of “total return”

2. Dividends reduce the value of a company’s stock by an equal amount

3. Dividend investors should focus on companies “like” Apple

I’m not sure how many times this line of reasoning has to be refuted. The examples in this article and the statements are not statement of “fact”, but instead they are statements of “opinion.” There is a difference between the two.

Now opinions are fine. We all have opinions about everything. But, it would appear that Mr. Landy apparently does not understand the difference and I am quite sure that many of his follower do not understand the difference either.

ANOTHER WAY TO LOOK AT THINGS:

There is no investment strategy that is intrinsically better than another. That's not an opinion. It's a fact. The reason that this is a fact is because:

1. Every investor has to determine his or her goals in investing.

Some investors are trying to accumulate more total net worth. Let's face it, that is a worthy goal. Having 500k to invest in an income producing activity, will, in fact give you more income that investing 100k will. So, accumulating wealth or net worth is one goal that an investor might have

Some investors have already accumulated net worth. These investors may be less risk adverse than their growth counterparts. These investors may have a goal of creating an income stream that is reliable and one that can grow year after year through reinvesting that income. This can be achieved in stocks, it can be achieved with rental properties, it can be achieved with CD's and even with other fixed investments.

Even if I own a CD that pays 1.25% and I take that money and reinvest it or leave it in the CD, my net worth in the CD increases with each interest payment I receive. It's called "compounding" and it works both in savings accounts and in dividend paying stock.

2. The style of investment is also an individual choice.

Some investors purchase Blue Chip stocks that pay a dividend. Many of these investors will look at various metrics, including dividend growth rates, payout ratios for those dividends, and try to find some level of security in the continuation of the dividend. Some of these that come to mind are companies like Coca-Cola (NYSE:KO); Procter and Gamble (NYSE:PG), Kimberly Clark (NYSE:KMB).

Some investors look for value priced stocks. Stocks that are beaten down, stocks that are cyclical and out of favor at this particular time, stocks that have intrinsic value that for all intents and purposes, the market may not see. Some stocks that come to mind are Alcoa (NYSE:AA), Avon (NYSE:AVP), Hasbro (NASDAQ:HAS), or Aflac (NYSE:AFL).

Other investors practice a style known as "momentum" trading. They look for stocks that are rising in price and that rise in price is called momentum--to the upside and they go after those companies. These are companies like Netflix (NASDAQ:NFLX), Green Mountain Coffee Roasters (NASDAQ:GMCR) come to mind.

Just as investment strategy is an individual choice, dividend style is also an individual choice. There is no strategy or style that is a consistent winner, all the time, every year, or in every market.

THE BOTTOM LINE:

In my personal life, I prefer blonds. You may prefer redheads. I prefer Ford (NYSE:F) trucks. You may prefer Chevy. I like living in the country. You may like living in the city. I love Tim Tebow. You may hate him. I like red meat. You may be a vegetarian.

Whatever you are is your personal choice. For me to attack you or criticize you for your personal preferences is just plain foolish. Who appointed me to tell you how to live your life, where you should live, how much money you can make, how much you should pay in taxes, and what you should invest in?

I can give you my opinions. I would hope that you, in turn, would challenge me to produce facts, in order to support my opinions. The least I can do, if my opinion will potentially impact your life in a positive way, is to provide you with enough facts so that you can come to your own conclusions and make your own decisions.

Whenever people offer their opinions, you have to understand and challenge them to prove it with facts. Sometimes you can prove things with facts--and sometimes no amount of fact will sway another person's opinion.

Your obligation and my obligation in life is to live with an open mind so that if, in fact, I am living with error in my life, I might be man enough to listen to the facts, consider the facts, and perhaps admit that I may have been wrong with my previous belief system.

WHAT I KNOW ABOUT MY INVESTMENTS:

I began a portfolio 6 years ago. I started with 100k, investing in dividend growth stocks. I selected 10 stocks that are household names and are not very exciting by traditional standards.

That portfolio can be viewed here.

Cutting to the chase, the portfolio, as represented in the article grew 68.5% over the 6 year period ending 12/15/2010. That represents an 11.4% annual growth rate over the time period. The portfolio did it with limited risk and with dividends reinvested.

Could I have made more money (total return) with another strategy and style of investing. Maybe, maybe not. But the facts are that the portfolio performed to in excess of my goals and better than the market overall.

Whatever strategy and whatever style you choose is an individual choice. Please don't tell me I'm foolish for investing the way I do. It serves no purpose other than trying to confuse people with opinions rather than fact.

How anyone can suggest that they are a Registered Investment Advisor and not be knowledgeable about every dividend investing style, not presenting alternative approaches to their client needs, or who will only "sell" their own agenda or products to their clients really does a disservice to the consumer.

Disclosure: I am long KO, ABT, JNJ, T, KMB, PG, MCD, XOM, CL, WMT, HAS, AFL.