bearfund

Why I Prefer Dividend Paying Stocks

Very few companies that do not pay dividends are actually investing the cash in their businesses. The typical non-dividend stock is in a tech company that fancies itself a "big time growth player". Classic examples are MSFT, GOOG, and AAPL. Those tens of billions in cash that they "reinvested in their businesses" are in fact not invested in anything. They're sitting on the balance sheet doing nothing. Because the truth of the matter is that those companies have one or two good businesses and attempts to grow have been met almost universally by failure. So if they do "reinvest" then you can kiss that pile of cash goodbye. And in the meantime for every 100 shares you hold you have 80 shares in a profitable business trading at 40x earnings and 100x book, plus 20 shares in a money market fund that trades at a 500% premium. Is either one a good investment? I'm not going to argue with the tape by shorting these guys but I think you'd be better off in gold.

As for when the "right time" might be? Market close on Monday was one of those "right times" for taking a chunk of gold out of the cellar and exchanging it for solid stocks that will pay 4-10% dividends for decades to come. Which is exactly what I did. No doubt there will be more, perhaps even better, such opportunities. You don't have to buy at the exact bottom to make money, you just have to buy when the current and future yield is high enough to be worth the risk. Because of the mega-boom in US stocks over the past 25 years, that mostly means the only time you will be compensated for the risk is after deep waterfall plunges. Even the best companies are overvalued 95% of the time now. That is why I rarely believe in automatic dividend reinvestment. And of course when prices really get out of hand I just sell.

Permabears use this persistent overvaluation as an excuse to do as you suggest, take no risk, and sit on gold and nothing else forever. That's fine if you have a source of income sufficient to meet your lifetime objectives without any returns. I'm not in that happy position, so I must take some risk. I try to take it wisely, which is to say when I'm likely to be paid for it. This is one of the rare times I think that just might happen.