Why Cash Dividends Aren't The Sole Basis For Investing

Why You Don’t Exclude Stocks Based On Who’s

Paying A Dividend

                                                                                                                                                By: Brendan Magee

I heard a financial expert say that she wanted people to start investing, solely, in the stocks of companies that had been paying a cash dividend to their shareholders. She said this was a way to offset the low interest rates banks were paying on their certificates of deposit.

With this as the criteria for stock selection, if we could afford it, we could have invested in 29 of the Dow Jones Industrial Average Companies and felt confident in our investment decisions. Or at the very least we would have excluded Cisco Systems Inc. because until March of 2011 it had never paid a cash dividend to its shareholders. Unfortunately, if you spent too much time patting yourself on the back for the winning investment strategy you employed, you may one day regret this investment selection process.

If we go back 29 years and excluded companies that did not pay a cash dividend, our portfolio would have also excluded Kohl’s department Stores, Oracle, St. Jude Medical, and Starbucks Coffee shops.

On the other hand, our portfolio would have included cash dividend paying stocks like Eastman Kodak, Kmart, and Dana Corp., an auto parts maker. The problem here is that our portfolio inclusions and exclusions are all guided by the past. The company’s dividend paying history, which unfortunately tells us nothing about what the future is going to bring. Thus, we are engaging in speculation.

 Dana, a company established in 1936, and Kmart, which dates back to 1913, have both filed for bankruptcy. Kodak, a company which is over 100 years old, stopped its dividend payments to shareholders in 2009, and has seen its stock price drop by more than 90% since 1990.

The five companies we excluded from our portfolio simply because they were not paying a dividend have provided their investors with a different experience. All five have recently initiated cash dividend payments to shareholders.

Cisco in its relatively short history, although, doesn’t have a long cash paying dividend history does have some achievements that have been greatly enjoyed by its investors. In 1990 it posted $27 million dollars in revenue. As of today it generates $40 billion in revenue and employees 70,000 people, and if you had been fortunate enough to jump on the initial offering price (1989) of $18 per share and perhaps bought 100 shares with a mere $1,800, today that investment would have grown by over 384% and be worth $508,320.  

The moral here?

Well, there a few. First, an investment’s past has absolutely nothing to do with its future. Investing based on the past and you are not investing at all. You are engaged in speculation and gambling. Two, anyone who claims to possess the ultimate criteria for buying or selling any company really doesn’t know which stocks to own or sell and should be completely ignored ( If they did know, they wouldn’t be telling you). Three, never invest in two, three, 10, or even 25 stocks. To be properly diversified takes a minimum of 11,000 holdings globally diversified. Owning that many, I really do not have to worry about who is or isn’t paying a dividend. Most likely, I already own it and the ones that go bankrupt or stop paying a dividend won’t have too much of an impact on my portfolio.

Brendan Magee is the founder and president of Inevitable Wealth Coaching. With questions, comments, or suggestions call 610-446-4322 or e-mail Brendan@coachgee.com.