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!
It’s crazy how much dividends add to your returns. I’ve seen similar charts and am always looking for stocks that pay nice dividends. I have a few I am waiting to invest in; hoping for a pullback first. Unfortunately, they have been holding up during the current market drop.
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You might just have to bite the bullet and buy some.
Great post. I’ve only watched shark tank once, but it was a fun ride.
I wish the top chart wasn’t such a long-term look. The last 10 or 15 years would have more to do with modern market conditions, I think. You’ve got me curious about dividends vs. other factos on the short term, now….
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No, but the bottom chart is. I think that the overall conclusion should be that dividends help decrease the volatility of a stock and add to the overall performance. It is hard to go wrong when someone is sending you cash on a regular basis.
I do not have it written in stone that I can only invest in stocks that pay a dividend, but it is pretty close. I would make an exception but the stock would need to blow me out of the water with its opportunity.
I do not like seeing the total of my investments continue to go down, but the cash deposited into my account every month and quarter are reassuring.
Just waiting for a couple paydays and the markets to keep going down to pick up more at a great price.
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Bingo! The added cash that can be reinvested at a lower price is what ultimately will make the returns better.
I only recently started watching Shark Tank but I absolutely love it. One thing I noticed about Kevin O’Leary is that he often tries to work a royalty into the deals he negotiates so he can earn residual income if the product takes off. That seems to match his stance on dividends as well.
Personally I’ve grown to appreciate dividends too. They are often the boring stocks that no one is talking about, but more times than not they will come out ahead of the flashy tech stocks that everyone sells their mother to buy.
Mike Collins recently posted..Dividend Investing in Plain English
Funny that he is into the income stream. Sounds like his personality. Boring and cash flowing companies are pretty good. Works for Warren Buffett.
I hear your points but I don’t exclusively buy stocks that have dividends. Bershire Hathaway has never paid a dividend because they feel that the stockholder will get more money back if the money is reinvested by the company and it is very difficult to argue with their results.
That being the case, I have moved more and more of the percentage of my stocks into dividend bearing ones.
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Buffett has never paid a dividend because he feels that he can pick better opportunities than you or me. And he is right! But he still owns plenty of stocks that pay HIM dividends, such as Coca-Cola.
Shark Tank’s a Scam! LOL, Just wrote a post outlining why. Anyway, with Treasuries yielding shit and stocks on the decline, I imagine the days of dividends comprising a larger share of total returns are back. I’m a believer!
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I have never seen it myself, but I did read your post a few days back. I don’t doubt that “reality” TV actually gets altered, scripted, or otherwise edited for entertainment purposes.
This is a very good angle CFM…It does however preclude a stock like Apple, who until very recently did not pay a dividend.
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You are correct, but how many times do you think I would be able to pick a stock like Apple. If such stocks are 1 in thousands, I would be more likely to pick the other 900 before getting the right one. Hindsight is great, but I need to look at probabilities. Avoiding home runs and hitting 20 singles in a row will still score a lot.
Dividend is a sum of money paid regularly by a company to its shareholders out of its profits. In other words, dividend is a payment by a company to its shareholders. These payments are a sign that the company is doing well and can afford to pay the owners back.
It is difficult for a business to create cash out of thin air, so dividends are great.
When you start buying dividend paying stocks, you’ll start seeing the money roll into your brokerage account. Make sure reinvest the dividend payments back into the same stock that paid you. Invest in some other stock. Take the money out of the account and use it.If you’re in retirement, and need the money then option #3 would be the best for you.
I just figured out the income for the second quarter, and it is looking pretty good.
My preference has been to buy stocks which pay a dividend and it has worked well. Most people I know who invest this way have not been as greatly affected by the ups and downs of the market. (Particularly the downs.)
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I agree totally. One of my stocks, Seagate Technology (STX), reported disappointing earnings so the stock is down. But they increased the dividend from 25 cents per share to 32 cents per share quarterly. The ups and downs don’t matter as much as long as the company is generating cash.
I think it is a great advice for everybody. Choosing the right stocks can end up having huge difference between ultimate loose and win.
I wish more people would pay attention to this, rather than looking for new Apple stock…
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Simply buying stocks that pay consistent dividends is a winning strategy over time. Just ask Warren Buffett.