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How to Play for Dividends

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Any suggestion that investing is a game is appalling to me. People invest in the stock market as part of a plan to attain goals and financial security. At least they should as far as I am concerned. The cover story in this week’s Barron’s tells “How to Play Today” for dividends. I agree with the premise that dividends are important and a vital goal, but disagree on how to invest for them.

The Barron’s article, which is a well-written exposition of the importance of dividends and their sustainability, recommends eight stocks to buy for their dividends. Here is where I disagree and why and my suggestion of what to consider instead.

  • The eight stocks seem to indicate that they are sufficient for a portfolio. Certainly not and these are too few to present any sort of diversification.
  • The listing does not provide the Price to Earnings (P/E) ratio which information I deem essential. So, the article is asking you to make a decision without this information.
  • The article gives the YTD return. How is a dividend investor expected to use this information to make a decision? It provides no attention to cash flow, and this year, so far, is certainly not a “typical” year to use as a guide to market growth.
  • The article bases its recommendations on the regularity of dividend increases by these companies, which is an important data point, so chalk one up for Barron’s.
  • The market cap or value is provided. That’s important information, but I do not see its relevance in this situation. I will point out that the market values of the eight stocks range from a low of $44 billion to a high of $389 billion. Does the author suggest equal dollar investments in all eight companies or some sort of market weight? If the latter, then any investment in the lowest cap company, could not have any meaningful effect on the portfolio as a whole. If equal amounts in the eight companies, then 12.5 percent of the portfolio will be skewed toward the smallest company in the group and another 12.5 percent toward the largest company in that group. Either way, it is certainly not diversified, and at least one of them is an outlier.
  • One of the companies is not a U.S. company. The ticker symbol provided did not work, but I found it by entering the company name in a search field. Investing in a foreign company directly injects the issue of fluctuating currency which has a further effect on the gains or losses, plus dividend withholding which will add a bit of difficulty to tax return preparation. The other companies all do business offshore but the fluctuations are handled within each company and do not directly affect the price of the shares since we buy and sell the shares in U.S. dollars.
  • Four of the eight stocks are on the Dow Jones Industrial Average (DJIA), so why not just invest in a DJIA exchange-traded fund? That should provide similar dividends with more diversification and less risk. Similarly, an investment could be made in an S&P 500 index fund. Right now the dividend yields on the DJIA and S&P 500 are 2.55 and 2.00 percent respectively.

I suggest reading Barron’s article and also consider my comments and try to formulate an investment strategy that would work best for you. Do not construe what I wrote as a specific recommendation, but use it as an opportunity to gain some insights about the stock market. Also, all opinions expressed here are my own and do not reflect the views of my firm or anyone else.

If you have any business or financial issues you want to discuss please do not hesitate to contact me at emendlowitz@withum.com or fill out the form below.

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