The Worst Stock Myth of the Decade

Two enormous recessions. Unparalleled government bailouts. An entire lost decade of growth.

It's been more than 10 years since the tech boom, and most of us have about the same net worth as we had in the first place -- or possibly less. The result of this flat and oftentimes irrational stock market has been a media rush to call "an end" for the average buy-and-hold investor.

The rumor mill is circulating and in full effect: Get out of the stock market before it's too late!

Is this the beginning of the end for the stock market, or will predictions of stocks' demise turn out to be the worst myth of the 2010s?

Where exactly are you going?
From 1980 to 2000, scholars like Jeremy Siegel and others were touting the wisdom of long-term, buy-and-hold investing; individuals and academics alike were virtually all on the same page. In fact, one survey by a Securities Industry Association in 1999 showed that most investors expected to earn a rate of return equal to about 30% -- confidence was at an all-time high!

Nonetheless, according to a recent article in The Atlantic, the modern diversified portfolio, the ease of which we use technology, and the growing popularity of mutual funds have possibly combined to erode our equity premiums. In fact, while most savvy investors used to expect an annual return of 8%-10%, there's plenty of chatter about that number being much closer to 4%-5% for years to come. Smithers & Co., an asset allocation firm, has forecasted that the next 10 years in the stock market will deliver a paltry 1.8%. So where do you go from here?

  1. Savings: While it would be nice to allocate a large portion of our nest-egg in savings, CDs, or Treasuries, it just isn't possible anymore. Savings accounts offer near-zero interest rates, and even the 10-year Treasury yields barely more than 2.5%.
  2. Bonds: Corporate bonds and bond funds have had a great run. However, even the global bond guru Bill Gross expects lower returns. According to Gross, because rates have nowhere to go but up, "bonds have seen their best days." And this comes from a man who manages a $214 billion bond fund. Ouch.
  3. Government: There may have been a time when you could save what was possible and expect your employer and the government to fill out the rest. With pensions long gone and 70% of workers not confident in Social Security, those days are simply over. For the first time ever, this year, payouts to retirees and the disabled will exceed what the government brings in from payroll taxes.

The bottom line is that regardless of what pundits will say about the stock market, it's the only real option you have left. You need individual stocks to protect your portfolio -- period.

Get back to basics already
Years ago, investing in dividend stocks was all the rage. But then the market took off, technology and globalization changed the way we invested, and dividends became boring or old-school. Investors expecting those 30% returns certainly weren't going to find them in dividends -- hence the flock to the fast-growers and the small-caps with unlimited potential.

Yet things have changed, and if you're not investing in dividend stocks right now, you're missing out on an amazing opportunity. Throughout history, academics have proven that dividend-paying stocks outperform their non-paying brethren. In addition, from 1871 to 2003, only 3% of the market's return actually came from capital appreciation -- that means that 97% came from reinvesting in dividends!

So in order to avoid the greatest myth of our decade -- that stocks can't provide above-average returns -- you've got to start investing in dividends. In particular, you need to find stocks that pay great yields, that have sustainable payout ratios, and that have illustrated a knack for increasing their dividends over time. To help you in your quest, I've identified seven stocks that not only fit the criteria above, but that are trading for dirt-cheap valuations (to help ensure value).

Company

Dividend Yield

Payout Ratio

5-Year Dividend Growth

P/E Ratio

Total SA (NYSE: TOT  )

4.8%

52%

8.7%

9.5

Hudson City Bancorp (Nasdaq: HCBK  )

5.1%

52%

19.8%

10.3

Exelon (NYSE: EXC  )

5.1%

55%

6.9%

10.8

DuPont (NYSE: DD  )

3.9%

47%

2.9%

12.1

Petrobras (NYSE: PBR  )

3.6%

42%

13.6%

8.2

Abbott Laboratories (NYSE: ABT  )

3.5%

47%

9.4%

14.7

Intel (Nasdaq: INTC  )

3.2%

35%

19.9%

11.7

 Source: Capital IQ, a division of Standard & Poor's

All seven of these stocks fit the perfect dividend mold -- they pay good, sustainable yields, they have plenty of room to grow, and they are trading for more-than-reasonable prices. In addition, I tried to choose stocks that would help create a diversified portfolio, so every sector is covered, from technology to finance to health care.

Don't believe the hype
There will always be people -- whether it be friends, colleagues, or professionals -- that employ fearmongering as a way to express their philosophy. However, while I agree that our investing world has certainly changed, I disagree with the notion that returns will be dismal and that you must avoid stocks to ensure your financial safety. Investing in dividend stocks is still a prudent, reliable, and wealth-generating way to keep you on the fast track toward retirement. You may not get rich overnight, but you can certainly sleep well knowing that you didn't get bullied in the wrong direction.

Curious what the most popular dividend stock is? Check out this article to find out.

Jordan DiPietro owns shares of Exelon. Exelon and Intel are Motley Fool Inside Value recommendations. Petroleo Brasileiro and Total are Motley Fool Income Investor recommendations. The Fool owns shares of Exelon and Intel and has also written puts on Intel, on which Motley Fool Options has recommended buying calls. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy never stops worrying about your retirement.


Read/Post Comments (25) | Recommend This Article (107)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 20, 2010, at 1:32 PM, keesluijt wrote:

    Hi Jordan,

    although accurate for the most, please note that Petrobras (PBR) only has a divident yield of 0.9 % at this point in time, and not the 3.6% you mention in your article.

  • Report this Comment On August 20, 2010, at 1:51 PM, judithjo wrote:

    You mention INTC here for a good dividend on today's date, but your other articles about INTC are questioning the smarts of INTC's purchase of McAfee at a premium price. Makes me wonder if you Fools are reading each other's articles. Should I buy INTC for the div or avoid it for its purchase of McAfee?

  • Report this Comment On August 20, 2010, at 2:38 PM, TMFPhillyDot wrote:

    @judithjo,

    Personally, I have not written any articles about the intelligence of INTC purchasing MFE. However, there are many writers at the Fool, and we all have varying opinions about stocks -- that is what makes it such a great place. We champion diversity of thought and feel that it gives our readers multiple viewpoints.

    Thanks for the comment!

    Foolishly,

    Jordan (TMFPhillyDot)

  • Report this Comment On August 20, 2010, at 3:03 PM, TMFPhillyDot wrote:

    @keesluijt ,

    When I calculate the data (from today's prices), I get a yield of 3.2%. This is 0.85 dividends per share/26.85 price per share = 3.2%. The currency I am using is BRL, not dollars. Maybe that is messing with yield calculations.

    Foolishly,

    Jordan (TMFPhillyDot)

  • Report this Comment On August 20, 2010, at 5:23 PM, TMFPhillyDot wrote:

    I should have also noted that the 5-year dividend growth rate is compound annual growth rate (CAGR).

    Thanks!

    Jordan (TMFPhillyDot)

  • Report this Comment On August 20, 2010, at 5:30 PM, fire56 wrote:

    you all have to remember that all the advice you read on the computer is mostly pure scam. advice on the computer is just like talking to a polititian.

    All-All the info that is given is intended to empty your pockets, not to enlighten you as an investor.

    Too bad, nobody gives you real advice, it's the same as going to Vegas and playing the slots.

  • Report this Comment On August 20, 2010, at 5:40 PM, centerline150 wrote:

    Er, not to be a shill for TMF fire56, but, ah, I've done rather well with what I've learned from TMF. And judithjo, yes TMF writers DO have conflicting opinions on occasion, which DOES (if you read carefully) help you learn (ref. my first sentence above).

  • Report this Comment On August 20, 2010, at 5:48 PM, ttocsmij wrote:

    @ fire56: Dude, OUCH! Anyhow, the trick is to ignore any get--rich-quick chatter and do your own homework; at which point TMF is only a source of information as is intended. BTW, going to Vegas you know at least 5/6 of the bets will fall in favor of the house (it's built into the house odds calculations).

  • Report this Comment On August 20, 2010, at 5:58 PM, Turfscape wrote:

    fire56 wrote:

    "you all have to remember that all the advice you read on the computer is mostly pure scam. advice on the computer is just like talking to a polititian."

    So, your advice to me is to not take Motley Fool advice because I read it on the computer? Thanks!

    But...wait...YOUR advice is coming to me on the computer, which means I shouldn't take YOUR advice either...which means I SHOULD take the Motley Fool advice...oh I'm so confused!

  • Report this Comment On August 20, 2010, at 6:05 PM, EnigmaDude wrote:

    fire56 - I will be happy to give you "real" advice for a price. Is that what you want? I'm quite happy with the "free" advice that I get from this site.

  • Report this Comment On August 20, 2010, at 6:35 PM, HSHEnterprises wrote:

    We should not forget, you are selling participaton.

  • Report this Comment On August 20, 2010, at 6:41 PM, WestBend1 wrote:

    Jordan,

    I agree that the average bond or bond fund does not have much to offer, but if an investor is willing to take the risk of equities, why not look to high yield, or junk, bonds? In the event of liquidation or bankruptcy, you stand in front of the equity holders, so there is less downside risk than with the stock. Also, the yields are pretty attractive right now. If you own a high-yield bond fund, you gain diversification and a distribution yield above 7% in a lot of cases with the opportunity of capital gains as well.

    What are the reasons a risk tolerant investor should not invest in high yield bond funds?

  • Report this Comment On August 20, 2010, at 8:03 PM, pinestholdings wrote:

    "Throughout history, academics have proven that dividend-paying stocks outperform their non-paying brethren. "

    Well, of course. That goes without saying. Dividend stocks are much older, are much more mature, and very rarely go broke. This is comparing apples to oranges. A similar statement would be "Academics conclude that those who major in business earn more than the average american." Well, of course they do - majoring in business means you have a college degree, whereas the population at large will drag down the others with a college degree. The statement is misleading - it reads like business is the most profitable major, but it doesn't really say that.

    That says nothing about business majors (dividend paying stocks) versus, say, English majors (non-dividend paying stocks that are still solid companies). A much more apt comparison would be dividend paying stocks to stocks that are also stable but *grow at the same rate but do not pay dividends*. I'd think you'd find some surprising results.

    Dividends are great - but taxes kill them. If you are in an IRA, dividends are an absolute workhorse. If you are outside of an IRA (or an archer), dividends are absolutely killed by taxes. By not distributing the earnings, companies can grow much faster. "Invest in dividends!" is a silly mantra. Invest in quality companies at a good price is a much better one, and it just so happens there are more quality companies among to dividend payers than among non-dividend payers. In other words, searching for good dividends is a crutch that gives you a higher probability that if you are just spending a few hours a week picking stocks you'll hit a good one - in the end, you are really searching for good companies at good prices, and a dividend makes you more likely to be correct.

    The whole "is buy and hold dead?" argument really makes me angry. Its not about your strategy. Its about doing the work. You shouldn't be able to buy the market and be up 8% a year. You need to do your homework. Of course buy and hold isn't dead for stocks - you need to do your homework. If you *buy the right stocks* buy and hold is a great strategy. If you are throwing darts at a board - i.e. you can't read financial statements, you don't know accounting, and you don't read SEC filings - then buy and hold is silly. If you buy good companies, then buy and hold is great. Nobody can predict the stock market's appreciation 10 years from now. Thats just nonsense. In the short term, the market is a voting machine. In the long term, it is a weighing machine.

    Finally, I *seriously* question your recommendation of petrobras as a "solid buy and hold dividend stock", and this leads me to question you overall. I'd like you to explain yourself here. Petrobras is anything but a buy and hold dividend stock. 80% of its reserves are in Brazil. It derives 57% of its earnings from Brazilian domestic sales. Petrobras is a huge bet on the Brazilian real. If the currency were to, say, lose 47% of its value (which has happened TWICE in the last TWO years), Petrobras' dividend would evaporate. Anyone who invests in the company must either (1) be betting the real will rise or hold steady or (2) hedge out the currency risk by using options on the Brazilian real. Could you explain how this is a "solid dividend payer" for a buy and hold strategy? It is basically a huge bet on the brazilian real. In the last annual report, Petrobras stated that "a devaluation in the real would have a material, significant impact" on the companies' ability to pay dividends. Further, given that Petrobras debt is denominated in dollars and its income is in the real, a severe devaluation could actually make them insolvent. Author, how is this a stable, dividend stock?

    Why can't retail investors trust the market? Because they are told to buy Petrobras as a "dividend stock". Thats why. Its a huge currency play. That IS NOT EVEN MENTIONED.

  • Report this Comment On August 20, 2010, at 8:06 PM, pinestholdings wrote:

    Jordan, as a final note, in addition to asking for a justification on the Petrobras recommendation, I'd like your honest answer: do you read any annual reports or SEC filings before you recommend a stock to the world, or do you just run a screen?

  • Report this Comment On August 21, 2010, at 1:18 AM, cordwood wrote:

    Jordan,

    As you have pointed out in other articles,[PAYX , T], the payout as a percent of FCF is another good indicator..... your charts of earnings vs dividend are quite illusrative,and would be especially so if div./ FCC were added...more work for you,but kudos are bred by individualistic efforts.

    Re CAGR/Div. growth correction/addition,[ w/o being asked] :You were on the ball w/ that...my frequent complaint is that MF writers don't qualify there data w/ regard to "Growth" percent e.g.,Total Return ?..w/ or w/o div. reinvested? or only price appreciation?...etc.

    Thank You

  • Report this Comment On August 21, 2010, at 11:35 AM, jrj90620 wrote:

    Forget dividends unless you absolutely need the income to survive.Better to just find great companies with great management that are growing faster than the economy internally and through acquisitions.You don't want too risky companies with weak balance sheets or companies satisfied to just stagnate.A great company should be able to reinvest it's earnings to grow the company rather than give them out as taxable dividends.

  • Report this Comment On August 22, 2010, at 9:38 AM, mpcrump wrote:

    Good stuff. If your Worst Stock Myth and the Great Stock Myth articles are relatively on mark are there not some much more larger changes that need to occur for the average investor? For example, in the Great Stock Myth article there are references about greater savings being needed. Saved to what? And while Motley Fool's may be different how many Americans have a large amount of their investment portfolio tied up in limited and simplistic 401k/403b plans that are fully enclosed by the stock myth? Is it time for radical changes in 401k plans?

  • Report this Comment On August 22, 2010, at 10:15 AM, plange01 wrote:

    one of the biggest myths buy and hold! look where that would have got you!a giant money making machine like microsofts stock is cheaper now than when it split to $25 almost 10 years ago!

  • Report this Comment On August 22, 2010, at 3:07 PM, JustMee01 wrote:

    People get way too focused on minutia. The point of his article is straightforward and intentionally simplistic, from my perspective.

    If you don't reach for excess gains, and concentrate on solid buy-and-hold above-average yielders, you have a simple formula for protecting principal and achieving an average, boring, quite respectable return. Chasing above average short term profits comes hand in hand with increased risk. Everytime the market is roaring, people point to buy and hold as antiquated. Then a crash comes and buy and hold is declared dead, because a ton of stocks achieved valuations they couldn't fundamentally support.

    Blah, blah, blah. Buy and hold works, when it is appropriately applied to simple, entrenched, profitable companies. It doesn't when it's applied to a whole host of other companies. He's advocating a simple method that's hsitorically profitable and resitant to catostrophic events. Nothing more, nothing less...

  • Report this Comment On August 22, 2010, at 7:02 PM, FutureMonkey wrote:

    I don't think that expecting modest returns from equities is really a "myth" so much as a perspective. Many investors large and small are in "protect capital" mode, which is willing to accept guaranteed income at low risk with the majority of their portfolio. Looking at Eastman's data on long secular bear/bull markets over the last 100 years, SP500 is still overpriced relative to earnings, placing us squarely in the jaws of a 10-15 year Bear starting in 2000. Based on that one would expect pretty choppy sideways market for several more years if not longer.

    The good news is that investing is not an either or proposition. You don't have to choose individual stocks OR corporate bonds, dividend paying stocks OR CD/cash. I'd go with an asset-allocation model that you are comfortable with and rebalance semi-annually. More or less ensures selling high and buying low without wasting a whole lot of time trying to time movements in the markets. For me almost all my near need non-retirement savings is in cash and investment grade corporate bonds, while most of my retirement money (still 25+ years away) is in a healthy diversified stock portfolio (70%), corporate bond fund (15%), energy/precious metals commodities (5%), and cash (5%).

    Fear is a terrible reason to make an investment decision. Fear of loss or fear of missing gains is not solid ground for building a secure financial plan. Individual Dividend stocks are a good place to have your stock portfolio while playing defense.

  • Report this Comment On August 23, 2010, at 8:08 AM, sept2749 wrote:

    Quite frequently I notice mistakes in dividend yields in Motley Fool articles. In this article it's PBR which yields approx. .9% not 3.6%. I understand anyone can make a little mistake not caught by proofreading but when you are writing an article about yields you "gotta" get the yields correct. OK? OK! Otherwise I love dividends and if one has time it's the only way to go.

  • Report this Comment On August 23, 2010, at 9:54 PM, rlcato wrote:

    @ sept2749:

    Quoted TMFPhillyDot above:

    'When I calculate the data (from today's prices), I get a yield of 3.2%. This is 0.85 dividends per share/26.85 price per share = 3.2%. The currency I am using is BRL, not dollars. Maybe that is messing with yield calculations.

    Foolishly,

    Jordan (TMFPhillyDot)'

  • Report this Comment On August 25, 2010, at 11:56 AM, Thompr97 wrote:

    @plange01,

    You still have to be smart about it. For instance, even though this has been a "lost" decade, I went strong into Apple (AAPL) as opposed to Microsoft (MSFT) in 2001, and my portfolio has been vastly rewarded.

    Anybody that couldn't see that Microsoft had no room for growth (unlike Apple) and little vision for creating future growth (again, unlike Apple) is too blind to play the investment game.

    Buy and hold truly does work... but only if you buy for a legitimate reason and hold only while that reason stays valid.

  • Report this Comment On August 27, 2010, at 9:38 PM, philkek wrote:

    Thanks MF and other fools. Good article with many thoughtful comments. Once again I find most of you are smarter than me in this investing business. I'm still learning. I've made good gains by buying and holding dividend paying stocks. I own none of the stocks listed here but will do my homework on their fundamentals before investing money in any of them. Better Business Bureau warns all fools to investigate BEFORE you invest. Fool on for profits.

  • Report this Comment On August 31, 2010, at 9:15 AM, Calabogie wrote:

    It seems to me that the one thing that could have been learned from all of the uncertainty in the market was dismissed as [f]oolish and that one thing is that "stops" can save you a lot of money.

    I've never been a buy and hold person but I recognize the value of it for people who don't have the time to watch their investments every single day. What I don't understand is the attitude taken toward a simple preventive measure like a stop-loss or trailing-stop on a trade.

    If a stock goes up 50% from your buyin, why wouldn't you want to lock in at least a 25% gain? The argument that you may be stopped out of the trade before the stock takes off for a 100% gain seems to be non-[F]oolish thinking to me. Sure, you may miss out on an incredible 10-bagger because your trailing stop hit but you also could save yourself from taking a major loss. By placing a trailing-stop you are certain to get a positive gain from it. By placing a stop-loss you make certain that you only lose a specific amount instead of possibly losing the entire amount of the trade.

    Yes, stops take some time and effort to learn how to use them properly. My point is that if people are reading a site like TMF it's fairly certain that they will TAKE that time and effort if it could save them money. Why TMF refuses to present legitimate guidance concerning stops is beyond my comprehension.

    Calabogie

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