Dividend Investment Myths

There is a commonly told myth that says that companies that pay a dividend misallocate funds that could be used to generate new revenue or grow the company. According to this myth the lack of growth in the company will keep the stock's price low over the short and long term. This is the most fascinating misconception that exists about dividend paying companies. The theory seemingly makes sense, yet after critical examination, the truth comes out.

The following is the performance of Dividend Achievers in the last year from August 8, 2007 until August 8, 2008. These stocks either hit a new low within the year and moved higher from there, or they have started the year at a low and continued upward. Keep in mind that the percentage change of these stocks does not include the annual dividend that would have been received over the same period of time and just looks at stock appreciation.

• A B M INDUSTRIES INC ABM 37.51%
• ALBERTO-CULVER CO ACV 30.48%
• AVON PRODUCTS INC AVP 38.81%
• BRIGGS STRATTON DC BGG 30.36%
• BADGER METER INC BMI 114.43%
• BRADY CP CL A BRC 36.36%
• ANHEUSER BUSCH BUD 49.53%
• CATO CORP CL A CTR 43.03%
• H R BLOCK INC HRB 47.13%
• DIEBOLD INC DBD 63.42%
• DOVER CP DOV 47.85%
• FAMILY DOLLAR STORES FDO 70.45%
• FRANKLIN ELEC INC FELE 43.80%
• FEDERAL SIGNAL CP FSS 64.40%
• FULLER H B CO FUL 44.83%
• GEN DYNAMICS CP GD 31.44%
• GORMAN RUPP CO GRC 81.31%
• GRAINGER W W INC GWW 30.04%
• HILLENBRAND INC HI 36.28%
• HARLEY DAVIDSON HOG 29.74%
• HELMERICH PAYNE HP 91.47%
• HILB ROGAL HOBBS HRH 66.12%
• HAVERTY FURN COS SC HVT 47.02%
• LEGGETT PLATT INC LEG 51.63%
• LA Z BOY INC LZB 51.04%
• QUAKER CHEM CP KWR 106.61%
• MCDONALD'S CP MCD 40.80%
• MDU RESOURCES GROUP MDU 37.95%
• MCGRATH RENT CP MGRC 79.77%
• MCGRAW HILL COS THE MHP 30.02%
• MCCORMICK & CO MKC 27.22%
• MYERS INDS INC MYE 54.78%
• NACCO INDS CL A NC 51.29%
• NORDSON CP NDSN 65.72%
• OWENS AND MINOR INC OMI 37.80%
• PROGRESSIVE CP PGR 31.13%
• PENTAIR INC PNR 39.32%
• PRAXAIR INC PX 32.60%
• RAVEN INDUSTRIES I RAVN 54.82%
• R L I CP RLI 27.30%
• ROHM HAAS CO ROH 70.61%
• ROPER INDUST INC ROP 26.93%
• SMITH A O CORP AOS 44.55%
• JOHN WILEY SONS CL A JWA 36.95%
• STEPAN CO. SCL 112.87%
• SIGMA ALDRICH CP SIAL 44.15%
• TELEFLEX INC TFX 37.30%
• TOOTSIE ROLL IND TR 27.20%
• TRUSTMARK CP TRMK 27.11%
• VALSPAR CORP VAL 35.96%
• UNIVERSAL CP UVV 26.00%
• VULCAN MATERIALS HC VMC 38.35%
• WAL MART STORES WMT 37.47%
• WEST PHARMA SVCS INC WST 40.62%
• WOLVERINE WORLDWIDE WWW 39.45%
• WRIGLEY WM JR CO WWY 46.37%

As you'll notice, companies with 10% to 25% returns were not included. However, if they were included during this time frame I would have had to add many more companies to the list. If anyone were to complain about receiving only 25% within one year with significantly reduced risk, then investing in stocks isn't their cup of tea. Despite the performance of these stocks I would not buy any of them since they are at or near their 1-year highs.

I currently hold a large position in Mine Safety Appliance (MSA) which I bought after its 20% one-day decline on July 28, 2008. This purchase took place after the sale of Nacco Industries (NC) with a gain of 25% in 4 months. I always focus on those Dividend Achievers that are within 5% of their 1-year low. At that time I determine (do my research) if the stock is worth buying. Once I find a Dividend Achiever that is a better alternative than the one that I'm currently holding (that has the highest return and in the shortest amount of time), I sell the stock and buy the alternative as I did with Mine Safety Appliances and Nacco Industries.

When considering stocks to buy, avoid those that are in industries which are at or near a new high. The best way to determine this is through the various sector or industry ETFs. The rationale behind this is that if a stock is at a new low while the industry is at a high overall, then when the industry does decline, the stock will likely take even further losses.

Disclosure: Long MSA

Comments

[captainccs:]

Using the growth since the last 52 week low as an indicator of long term grow is just pure nonsense. All it shows is that these companies do bounce back and that is just reversion to the mean working. The only other path would have been to zero. This is an example of data mining,

Also note these two statements:

>> I always focus on those Dividend Achievers that are within 5% of their 1-year low
>> When considering stocks to buy, avoid those that are in industries which are at or near a new high.

Dividends are used to select a universe of stocks but nowhere is there a comparison between this universe and a universe of non divided paying stocks. All the above says is buy low, sell higher.

Of the above list I hold FDO, the 5th or 6th highest bouncer-back on the list at 70.45%. I bought it three years ago when I thought it was at a low. Current Average Growth Rate (CAGR), a dismal 4.4%. Dividends did little to support this stock.

2008 Aug 12 10:59 AM

[E.D. Hart:]

Buy dividend payers and avoid financials!

2008 Aug 12 11:38 PM

[mydoghatescats:]

Intentional or not, what you listed as yearly performance appears to be performance off a recent 52-week low, two very different things.

2008 Aug 13 01:21 AM

[Dividend Inc:]

Thanks captainccs for your comments. You are absolutely right about the fact that I'm data mining. However, as with any stock purchase you face the potential for downside risk when you buy. For this reason, I only data mine the stocks that are part of Mergent's Dividend Achiever Index (approximately 350 companies) so that I don't experience buyer's remorse once I'm in a stock. If the price falls after the purchase, I can easily "justify" my position with the mantra of "buy and hold." In the meantime, I'll be compensated for my wait.

As you pointed out, I selectively examine only those that pay dividends. Of course, in reality I only chose those that are current and former Dividend Achievers. This means that I forego the opportunity to get the highest yields and the stellar performing non-dividend paying stocks. However, I am assured by the fact that management has an interest in seeing that the shareholders are compensated for their wait for the "promises" to deliver to materialize.

2008 Aug 13 04:19 AM

[goatfarmer:]

agree with captain ccs: the point (a point) of buying dividend stocks is to take advantage of long term compounding. A ten year period would be more persuasive.

2008 Aug 26 07:54 AM

[mouth:]

Excellent article

2008 Sep 01 12:29 PM