Buying Only Stocks that Pay Dividends

I recently ran across a video at Kitco’s Video News page that featured an interview with Kevin O’Leary who is a Canadian entrepreneur who founded SoftKey, a software company that eventually acquired The Learning Company before selling out to Mattel.  Apparently, he is also on the show Shark Tank on ABC which I have heard about but never bothered to watch.

I don’t think it is important to watch the full video, but I do think that he made one very important point which I will share with you and which I am working on implementing:

  • Never buy a stock that doesn’t pay a dividend!

It is really quite simple and makes a lot of sense.  He doesn’t look at earnings when evaluating a stock.  He looks at free cash flow and wants to make sure that some of that cash is being returned to the owners (the shareholders) of the company.

A Transition in Thinking

I am starting to see from where he is coming.  Much of the market’s return has been the result of dividends.  Just take a look at the following graph which I found at The Market Oracle:

If this graph doesn’t convince you of the importance of dividends, which account for over half of the S&P 500′s, then how about I show you another graph that looks at the performance of the Dogs of the Dow vs the S&P 500.  In case you didn’t realize it, the Dogs of the Dow are those stocks in the 30 from the DJIA that have gotten so beat up in terms of price, that their dividend yield is among the top 10 of those 30 stocks.

No Lost Decade for Dividends

So had you been holding stocks that paid dividends, there really would not have been a lost decade.  You would have received consistent payments of cash to add to your portfolio enabling it to grow and make money.  You can just look at the graph and see that the S&P 500 lost money during the decade that saw two major shocks.  And yet, stocks that paid dividends (namely, the Dogs of the Dow) actually made money.

Fortunately, it is possible to teach this old dog some new tricks.  That is why I am simply working on changing all the stocks in my retirement accounts to dividend paying stocks and tracking my dividend income this year.  I did manage to hit my goal for the 1st quarter.  Over the next 25 years, I will allow those accounts to grow and reinvest those dividends into more stocks.

In fact, I will probably buy some more STX and INTC this week since they have been holding up quite nicely during this recent market decline.  I will also watch the ONXX $46 puts get exercised on Friday so I can start my purchase of Nucor (NUE) next week.  I won’t get the dividend for this quarter, but should be in a position to pick it up in the third quarter.  The same holds true for INTC and STX since the ex-dividend date has passed.  Nevertheless, adding to these positions is just a good idea.

Obviously, I will continue to publish the quarterly update on the dividend progress and see if it continues to grow.  According to the charts above, it should be a great plan!

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