Dividends Do Matter, But There Are Two Sides To Every Story

Includes: BAC, BB, C, FB, GMCR, JNJ, KO, MO, NFLX, PG, VZ
by: David Crosetti


The question seems to keep being asked. "Do dividends matter?" That's such a great question! As a DG investor, I would answer in the affirmative. Yes, dividends do matter. As a growth investor, however, I might want to argue that dividends really don't matter. I am interested in capital gains. On the surface, your opinion should be based on your personal investment strategy and goal, but an opinion it is, nevertheless, and it's one that stirs a lot of debate.

When I started investing, my strategy was to save and invest enough money, so that when I turned 55, I'd have a million dollars. For a 30 year old junior executive, that seemed like quite a goal. After all, 30 years ago, a million dollars was a lot of money. With a million dollars, I would be set for life! I could retire at 55 and do whatever I chose to do with my time. How good is that? Unfortunately, things didn't work out quite the way I planned.

I began investing through the 401k opportunity at my job. The company offered a wide variety of mutual fund investments, as well as the option to invest in Coca-Cola (NYSE:KO) stock. Now, the mutual funds were mostly growth and value funds, and while there were a complete group of funds to invest in, the one investment that did the best for me was the holdings that I had in our company stock.

My mutual fund investments produced "distributions" during the year. I discovered that these distributions were mostly short-term and long-term capital gains. The reason I received them is because the mutual fund managers were buying and selling stocks all the time. My KO shares, on the other hand, gave me dividends. There were no capital gains, because nothing was being sold. However, I still got a "distribution" from the company.

What I Know:

Many companies have a culture of paying dividends and increasing those dividends on an annual basis-often at a growth rate that is larger than inflation. I don't want to argue if dividends are a good use of company money or not. I just know that "it is what it is" and why should I not be taking advantage of the opportunity to receive dividends while I hold a position in a particular company. I can't think of any reason not to.

When you purchase stock in a company that does not pay a dividend, you are essentially hoping that at some point in the future, you will be able to sell that stock at a higher price than you paid for it. Other than selling, you will not realize a true "profit" unless you sell. On the other hand, with a dividend stock, while I may wait for the price to appreciate and choose to sell in the future, while I am waiting, I am receiving a dividend every quarter that enhances my potential total return.

The argument that seems to take place with dividend vs. non-dividend stocks is this. Companies that pay dividends are not using their profits in the most effective way and are short-changing investors when they choose to pay dividends. The Latin word for that idea is "poppycock."

I can't change the fact that great companies like Procter & Gamble (NYSE:PG), Altria (NYSE:MO), Johnson & Johnson (NYSE:JNJ), Coca-Cola , Verizon (NYSE:VZ) and many more do, in fact, pay dividends. They are not planning to stop paying dividends and they appear to have a commitment to increasing those dividends moving forward. So, why not take advantage of that fact of life, when these great companies are priced at a value?

What You Should Know:

Any writer can cherry pick a particular stock and say, "If you invested in this company in 2008, you would have doubled your money." Just as that writer can identify great company growth situations, from a historical look backward, the market works looking forward.

But, for every winner, there are just as many if not more losers. Take Netflix (NASDAQ:NFLX) for example. Then how about Research in Motion (RIMM)? What about Green Mountain Coffee Roasters (NASDAQ:GMCR)? Facebook (NASDAQ:FB)?

These are some stocks that did not pay a dividend, but they were the hottest thing going for a while. Now, one can point out that dividend stocks like Bank of America (NYSE:BAC), Citigroup (NYSE:C), and a host of others have left dividend investors in a lurch as well.

But the dividend paying companies that make up the Dividend Champions, Contenders, and Challengers make up a diverse group of companies that can satisfy an investor. Many of those have had great capital growth since 2008 and all of them have been paying and increasing dividends as a "bonus" on top of their intrinsic value.

A Few Random Thoughts:

I would hope that any investor would have developed a set of metrics that they use in order to determine where and how they plan to invest their money. Specific stock picks should be part of an overall strategy that is unique to each individual investor.

While there is no single best investment strategy, market conditions and economic conditions often dictate where the most profitable investments will be found. Not too long ago, when you could purchase a 3 year CD with a 4.5% interest yield, that was a great investment. That is not the case today. Things have changed and so should your investment strategy.

When you discover value in the stock of a company, regardless of it being a dividend payer or not, the question you need to be asking is: "Is this an opportunity that meets my goals and objectives?"

DG investors and growth investors should not allow themselves to be locked into one strategy without having options to "mix and match" their holdings as conditions warrant. To do so is less than prudent and not at all something that I would find advisable.

There is an inclination for investors to focus in on one set strategy for accomplishing their goals. Mine was to be a millionaire by the time I turned 55. That was a worthy goal. Now, my goal is to provide an income stream that will support me in retirement without ever having to sell any of my positions to support me. That means that I have a target income number, a plan to monitor my investments to insure that my dividends are increasing faster than inflation, and at the same time, I also do not want to shy away from an obviously good investment that may be a pure capital gains play.

Regardless of which camp you fall in, being committed to only owning dividend stocks or only growth stocks is not taking advantage of the economic cycle or the market conditions as they are playing out in front of you.

Disclosure: I am long JNJ, PG, KO, MO, VZ, JNJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.