Every time I write about dividend investing, pointing out the simple fact that the implied safety as advertised can not be taken at face value, a number of individuals come out against my negative comments. The comments are not negative, only a reminder that like any investing strategy, be it active trading, growth, value, short-term or long-term, there are risks. One individual even went as far as stating that the content that interests him/her hinges on the “experiences” of other investors about dividends. I will save some time here and say that it’s like having a job: One gets a check and runs the risk of losing it, except that no labor is required.
To be clear, I write for a general audience, especially those seeking information so they can make intelligent decisions. And I’m not trashing dividends, but only giving the other side of the story that is often buried.
Thus, as I read the Seeking Alpha article “Why Dividends Matter In A Changing Market,” I saw that the caveat was clearly included.
So the message becomes clear. Be careful about investing in dividend paying stocks, because while they may be fashionable today, so were other investments, like technology stocks and we all know what happened with that "gravy train."
But one comment by a reader stood out, and it wasn’t addressed to anyone the last time I checked.
I agree that we are cycling back into a low interest rate environment and dividend paying stocks will provide good returns, with safety of principal.
With safety of principal? Appalling, to say the least! Thus, the stimulation to continue writing about topics that raise the most eyebrows continue to come my way. Coca-Cola (NYSE:KO) is one the best known companies in the world, and I can easily recognize that fact, although I don’t drink soda as a rule. Plenty of historical information can be found at the company’s website, including a short version of its humble beginnings.
On September 5, 1919, a consortium of businessmen led by Ernest Woodruff, Robert W. Woodruff's father, purchased The Coca-Cola Company for $25 million. The business was re-incorporated as a Delaware Corporation and its stock was put on public sale on the New York Stock Exchange, with common stock at $40 per share, and preferred stock at $100 per share. The initial symbol used for The Coca-Cola Company was CCO. By 1923, the symbol "KO" replaced "CCO."
Had an individual bought 1 share of Coca-Cola in 1919, after the last stock split on May 1, 1996, one would own 4,608 shares. That’s a wonderful investment, no “ifs” or “buts” about it, and a $40 investment turned into close to $300,000 as of the last quote, while the dividends along the way were the icing on the cake.
Let’s assume that the day after the last split, many people realized what a great story that was, and started buying Coca-Cola, and on May 2, 1996 the stock closed at $40.18. By July 15, 1998, Coca-Cola more than doubled and hit an interim daily high of $88.94. However, over the last 13 years the stock never saw the high again, and only on September 8 of this year did it even break though the $70 level, with an interim daily high of $71.77, a price last reached in 1997.
As one can construct best case scenarios, worst case scenarios are also valid, and can counter the “generic drug” approach that underpins some of the broad statements about investing. My intention is not to discourage people from investing in companies that pay dividends, but, once again, to point out that the advertised “implied safety” characteristic is not true.
Had an individual been unlucky enough to buy the stock at the high in 1998, I am certain that even with total dividends of $15.07 since then, one wouldn’t be too happy about losing $22 in value as of today, and although the stock delivered an income stream at an average rate of 2% to 3% per year over the period – nothing to write home about -- one could have done better elsewhere. An 8% overall capital loss over 13 years is hardly safe.
One argument that always comes back is that Warren Buffett has made a lot of money owning Coca-Cola, and he is a rich man. Yes, he is, but I can guarantee that he didn't become a billionaire from collecting dividends because the math doesn’t add up.
Ultimately, and at the risk of turning into Dr. Phil, emotion is the main cause for losses for both traders and investors alike – since some insist on a distinction -- and unless one bought the stock certificate in 1919 and then threw it into a box and never looked at it again, history has shown that humankind lacks discipline and is driven to protect assets. However, maybe there are some out there that are built differently, and can take a loss in stride. If that is the case, I apologize for not knowing you. Nothing personal, just trying to be a voice of reason.
The dividend story centers on one main thing: Income. And while some may bring out the fact that a dividend used to be viewed as an afterthought, the truth is that it is. Reason being that the stock market has always been a growth story, and as the so called “bull” emerged recently, dividend stories in the mainstream media have evaporated.
One thing never changes and will hold true for eternity: The higher the yield, the higher the risk, unless one doesn’t care about capital, and one reader stated just that. Thus, why not buy bonds, even junk bonds if capital is not a concern, and the table below shows the average yields for three corporate credit ratings that I obtained from my broker.
|6 Month||1 Year||2 Year||5 Year||10 Year||20 Year||30 Year|
Bonds come closer to “safety of principal” because with a bond one has a claim on a corporations’ assets, which a stock does not give. Why not bonds? Because deep down, growth is the game, and the recent dividend story has flourished only because growth has been elusive.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.