Southern Co. (SO) and Verizon (VZ) may be the "poster children" among high dividend-payers as...


Southern Co. (SO) and Verizon (VZ) may be the "poster children" among high dividend-payers as the quest for yield takes the utility (XLU), telecom (IXP), and consumer staples (XLP) sectors to frothy levels. The flip-side are health-care services (XHS), autos (CARZ), housing (IYR), and tech (XLK) - lower payers, but with relative valuations that have rarely been this cheap.
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Comments (16)
  • Paul Price
    , contributor
    Comments (1503) | Send Message
     
    See this for details...

     

    http://seekingalpha.co...
    25 Aug 2012, 11:18 AM Reply Like
  • bearfund
    , contributor
    Comments (1550) | Send Message
     
    Cheap on what basis? The only relevant metrics are current and future dividends. By definition, something yielding 1% is much more expensive than something yielding 5%. In order for a very low-yielding asset to be undervalued relative to a higher-yielding one, its rate of dividend growth must be both spectacular and likely to be sustained based on fundamentals and board policy. Otherwise the obvious conclusion that the 1% yielder is much more expensive (perhaps about 5x more expensive, in fact) than the 5% yielder is the correct one. Pop quiz: how long would it take an asset yielding 1.5% today to begin paying out the same amount as an asset yielding 5% today, if the lower-yielding asset grows distributions by 8% a year, every year, and the higher-yielding asset by only 2%? Answer: 22 years, and that's not counting the payouts you got during those 22 years nor the effect of reinvesting them, either of which would push us out to timeframes that are large relative to the life span of a human. And a lot can happen in 22 years to damage the growth prospects of either company. It turns out that even if you treat the 5%-paying asset as a bond and assume it will never increase its payouts at all, it still takes 16 years to catch up, not counting the income received. Forgoing all that income is a pretty big risk, so you really need a huge growth story to make it work. Not surprisingly, huge growth stories tend to generate a lot of attention from traders and speculators, who drive up the prices to unrealistic levels.

     

    Looking for example at XLK, it paid out 42 cents in 2004 and has never paid out the same amount since. Dividends have been erratic and there is no long-term growth trend. Even the short-term growth trend in the last 3 years is not spectacular: 23.67 cents in 2009, 32.28 in 2010, 38.45 in 2011, and 20.50 in the first half of this year. That looks a lot more like a steep recovery followed by decelerating growth than long-term accelerating growth. If you bought at the best price of 2002, your yield is now just under 4%, and in most of those years you collected little. If you bought VZ near its low in 2002, you not only collected many times more income between then and now, you have a yield of about 7.1%, much more if you reinvested.

     

    That's all backward-looking, so maybe we'll see tech and some of these other sectors start to dramatically accelerate distributions in coming years. If that happens, then those sectors are indeed historically cheap. But there's simply no track record of growing or even sustaining distributions from most companies in these sectors, and therefore no compelling argument that they are indeed cheap. A better case might be made that a particular stock is cheap; then we can examine the business and the board's view on providing a return to shareholders and weigh those along with the current payout against the market price. One cannot simply look at some non-dividend metric and conclude that an entire sector is historically cheap when it is yielding next to nothing.
    25 Aug 2012, 12:13 PM Reply Like
  • Paul Price
    , contributor
    Comments (1503) | Send Message
     
    http://bit.ly/PEUVJk

     

    Hang up on Verizon - Real Money Pro Aug. 22, 2012
    25 Aug 2012, 12:54 PM Reply Like
  • Julius Ferraro
    , contributor
    Comments (493) | Send Message
     
    Did you go to the school of Jim Cramer? You must factor in a multitude of different things then just the higher the dividend the cheaper it is + history of increases . If thats your case go buy up PBI CTL and WIN. All have big dividends but the payout ratio is extremely high and they all have declining business models.

     

    VZ is in fact very overvalued and carries a large debt load. Can't pay both the shareholder and their debt. Earning 2.00-2.50 a share and paying 2.00 currently. 52 billion in debt to go with it. Doesn't really sound like steal to me

     

    XLK is and index fund and it pays out just as much as it did in 2004. They can change their internal policy as well as the companies it owns.
    25 Aug 2012, 06:31 PM Reply Like
  • bearfund
    , contributor
    Comments (1550) | Send Message
     
    Julius, what part of "future dividends" did you not understand?
    25 Aug 2012, 07:27 PM Reply Like
  • CassandraSees
    , contributor
    Comments (485) | Send Message
     
    From my lowly point of view I have bought stocks with consistant payouts and in the higher range but a big deciding factor has been the underlying stock itself - - What good is a 10% dividend if the company is ready to go belly up and take you with it? The sector is important too - even during the 1930 depression people still ate food, fueled their vehicles, repaired their homes, used electricity, water, drank good ole' Coke, bought basic medical products, and used the luxury item of a phone - I can see the writer's point of view that the current stock price could be severely hit if market trends like flight to safety, higher paying dividend, looking to make a killing on the rise of the stock price, big cap company, etc. have pushed the stock price up, but if the company is strong it will survive the hit and continue to issue the dividends - But that is long term thinking - - A day trader does not look at a stock that way
    25 Aug 2012, 01:08 PM Reply Like
  • Paul Price
    , contributor
    Comments (1503) | Send Message
     
    You don't have to be a day trader to be aware than SO was as low as $40.06 and VZ bottomed at $34.65; each less than one year ago.

     

    The current valuations are above normal and will likely regress to lower absolute share prices.
    25 Aug 2012, 01:29 PM Reply Like
  • bearfund
    , contributor
    Comments (1550) | Send Message
     
    You're still thinking like a trader. Traders always think they know where the market price is headed, and are willing to take the risk of being wrong. Selling a quality income-producing asset in the belief that its price is sure to decline is a bet on what other people will do. It is a trade, a gamble on the market. Taking the proceeds of that sale and buying some other, lower-quality asset on the belief that its market price is sure to rise is yet another bet on what other people will do. It too is a trade, a gamble on the market. It's fine to exchange one quality asset for another if you believe the latter will generate more income for you. It's not fine to dump something you want and hold something you don't (be it another stock, cash, whatever) just because of some ill-defined perception that it's "overvalued". Forget the market; is it overvalued *to you*? That is, is there something you'd rather hold? If not, keep it.

     

    I am willing to accept that I will never get the best price on anything I buy. I understand that if I were perfect at timing the market, I could obtain the income I require with a dramatically lower capital outlay. And I accept that I cannot be, and will not be. What I am not willing to accept is finding myself stuck holding assets I don't want, never wanted, assets that aren't generating a decent return for me and have no prospect of doing so. And I am not willing to accept finding myself in a position in which I am being bullied by the market because I purchased an asset that gives me no way to earn a return on it other than by selling it. Never. That's for traders, who think they know what other people will do. I don't, and I don't want to find myself caring.
    25 Aug 2012, 02:42 PM Reply Like
  • Whitehawk
    , contributor
    Comments (3121) | Send Message
     
    "relative valuations that have rarely been this cheap"

     

    This doesn't apply to any of the stocks or sectors listed, at all.
    25 Aug 2012, 02:46 PM Reply Like
  • chopchop0
    , contributor
    Comments (4704) | Send Message
     
    XLK? Seriously--- near it's 52 week high?
    25 Aug 2012, 02:54 PM Reply Like
  • Retired Expat Investor at M...
    , contributor
    Comments (55) | Send Message
     
    The Barron's article from which this excerpt was taken is based on misleading comments by Craig Moffett, who spread Sprint bankruptcy speculation at March end, which damaged the stock.
    We know how it turned out.

     

    He said Verizon's revenue is growing at 2%, when in fact it is near 4%.
    26 Aug 2012, 12:20 AM Reply Like
  • CassandraSees
    , contributor
    Comments (485) | Send Message
     
    Just my two cents - I bought MKC in 2003 at about $29.00 (look at a long term chart for the stock) - - Should I have sold when it dropped from above $40 to less than $30 in 2009 and every other time when it dipped in price? I was with a broker at that time and the moves would have cost me hundreds to sell and rebuy. The lost dividends and the broker fees would have cost me dearly up to this point - - call me stupid but if the dividend is consistant and the stock is a solid company I am going to stay with it - VZ and SO are those kinds of stocks - Solid and will be there when the dust settles
    26 Aug 2012, 10:37 AM Reply Like
  • Paul Price
    , contributor
    Comments (1503) | Send Message
     
    You could have done very well selling at $40 and buying back at $30- not the other way around as you described [selling AFTER the drops].

     

    VZ was very expensive recently and should have been sold to allow for repurchase at a discounted price in the future.
    26 Aug 2012, 12:00 PM Reply Like
  • firstinsnow
    , contributor
    Comments (607) | Send Message
     
    I guess I should give back all those dividends VZ has
    issued me in the last several years.
    And that growth last 12 months, well that was just outrageous.
    Where do you suggest I send that money?
    Afterall I certainly shouldn't have received any of it over
    my original investment.
    [Tongue planted firmly in cheek]
    snow
    26 Aug 2012, 11:06 AM Reply Like
  • PalmDesertRat
    , contributor
    Comments (3631) | Send Message
     
    took some qqq profits today at 69.15
    6 Sep 2012, 10:56 AM Reply Like
  • PalmDesertRat
    , contributor
    Comments (3631) | Send Message
     
    took some more qqq profits today at 69.53
    6 Sep 2012, 02:57 PM Reply Like
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