Why Dividend Growth Investors Should Not Ignore Price

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Includes: AVY, BAC, GE, MAS, PFE, RF
by: Robert Mattei

Summary

Many DGI investors claim to ignore price and will not sell a position unless there is a dividend cut.

Is this the best policy?

Let’s take a look.

Recently The Part-time Investor wrote an interesting article on his Kiss Dividend Portfolio. I applaud him for having achieved excellent returns. One concern I had with the article was the author's apparent believe that market prices could be ignored:

This past month has been a perfect example of this. As is typical of many DGI portfolios, mine has many energy-related stocks - oil producers, MLPs, etc…I was certainly aware of these price drops, and even followed them, but at no point was I tempted to even consider selling any of these stocks. They all pay me a nice dividend, they have all raised their dividend in the past year, and I expect they will all raise their dividends again next year.

The market is sometimes wrong. Often stock prices rebound and dividends are unaffected. But the market is not always wrong. There are a lot of smart investors who make up the market; when the market speaks you should at least consider what it's saying. Questioning the conclusions of the market is defensible; to just assume it is wrong is hubris.

Oil stocks have lost value because they are expected to earn less money. Companies that earn less money often cut dividends. Oil prices are particularly hard to predict. Who predicted the current turmoil in oil? How can the author be sure oil will rebound in a timely fashion and oil companies will not cut dividends?

My contention is stock prices drop for a reason, and you cannot, without justification, assume that prices will bounce back and dividends will not be cut. That is true even for companies that have excellent dividend histories.

If you take a look at fallen dividend champions, the price almost always dropped long before the dividend was cut. If you blindly assumed the market was wrong and waited till the dividend was cut before selling you increased your losses.

I'll illustrate the point by showing charts for some fallen champions:

Pfizer (NYSE:PFE) - price started dropping in early 2007.

The divided was not cut until 2009. If you used the authors criteria:

My criteria for selling a stock are also very simple. I will sell if the stock cuts its dividend.

Then you would have sold the stock at its lowest point.

A few more examples from the fallen dividend champions:

The price for Avery Dennison Corporation (NYSE:AVY) starts dropping early in 2007.

The dividend is not cut until 2009. Again the worst time to sell would have been after the dividend cut.

General Electric (NYSE:GE) same story:

Masco Corporation (NYSE:MAS):

Regions Financial Corporation (NYSE:RF):

Bank of America Corporation (NYSE:BAC)

Conclusion

Almost all the fallen dividend champions follow the same pattern. The price drops before the dividend cut. The market perceives risk or sees earning going down and the stock loses value - the dividend cuts come later. If your approach is to ignore the price and only react to dividend cuts, you will often be selling your stock after the damage has been done. I would contend that the same problem exists if you sell after cuts in credit ratings. Market prices are far from perfect indicators, but they are good enough that they should not be ignored.

There has been a fair amount of research showing that markets are often smarter than experts in a wide range of fields. When a stock's price drops, you should do your due diligence and make sure your confidence in the stock is still deserved.

I want to emphasize that The Part-time Investor has done admirably, and I applaud his approach. My concern was with one part of an article he wrote. I would not have written this article if I had not read many other authors and commenters who seem to believe the market should be largely ignored. I disagree. That's my opinion I'd like the know yours.

I am not a professional adviser or researcher. I am an individual investor who studies investing and shares my thoughts. I encourage all investors do their own due diligence and please share your findings. I strongly feel the best thing about Seeking Alpha is the sharing of ideas. Please comment; I value your input. Divergent opinions are welcome.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.