Why Dividends Ruin Your Returns

There are many reasons to own dividend stocks:

  • They provide a steady (and often growing) stream of cash.
  • They give you some security because of those regular paybacks.
  • They instill fiscal discipline in the company's management.
  • And, oh yeah, per countless studies, dividend stocks outperform non-dividend payers.

That said, dividends can ruin your returns. I'll show you how.

Learn from this terrible investor
The story starts with my dad. If he wrote an investing book, his maxims would include: "Be extra greedy when others are greedy and soil your pants when others are fearful." In short, he's a wonderful father and a terrible investor.  

I was home for the holidays, and I made the mistake of using a financial analogy to prove a point. I said something to the effect of "that would be like buying a stock just because it had a 20% dividend yield."

My point was that you have to dig past the sexy headline on investments (and other things). With every "too good to be true" investment, you have to at least identify the possible catch.

My dad stopped listening after 20% dividend yield, though.

His first question: "There are companies that have 20% dividend yields?"

My answer: "A few real estate investment trusts have dividend yields in the 15%-20% range, led by American Capital Agency (Nasdaq: AGNC  ) , Cypress Sharpridge Investments (NYSE: CYS  ) , and Chimera (NYSE: CIM  ) ."

His second question/directive: "We need to buy these stocks! In five years, we've made our money back!"

My answer: "This is why Mom handles your finances."

My longer answer
My father's gut reaction is that of many investors (including me). If a 20% dividend can sustain itself for just five years, any remaining dividends or stock price is a pure return.

But there's a fundamental flaw in this logic. Many of the individual investors I talk to equate dividends with the true returns of a business. Here's why that's not true.

Dividends can (and should) flow from the cash flows derived from earnings, but there are other ways to pay out a dividend. Consider these other options. A company could pay out a dividend by:

  • Draining its cash holdings.
  • Selling off assets.
  • Diluting your investment by issuing more shares of stock.
  • Increasing its risk position by taking on more debt.

The problem here is that all of these options are temporary solutions. You eventually run out of cash and assets. Issuing more shares to pay shareholders can turn into a legal version of a Ponzi scheme. And increasing debt increases bankruptcy risk. Only long-term earnings power can sustainably fuel big dividends.

Sure, but we're only talking five years
As my dad pointed out, though, when you're talking about dividends of 20%, you don't really care if the business is around 10 years from now as long as it pays those dividends for more than five years.

Looking at the REIT example in particular, American Capital Agency, Cypress, Chimera, and their brethren are making a killing because of the government's interest rate policy. With the government keeping rates low, these REITs have been able to borrow money very cheaply and profit from large interest rate spreads on the longer-term mortgage-backed securities they buy.

And they've been paying out almost all of these profits because, as REITs, they have to to qualify for special tax treatment. Pretty sweet deal.

The problem with this is that these payouts leave REITs cash poor. If they need more funding (either to grow or to keep up interest and dividend payments), they have to sell off assets, issue more debt, or issue more stock. Which is fine when things are going well, but when they don't, REITs are extremely sensitive to interest rate movements and the health of credit markets.

And if you've paid attention to mortgage interest rates recently, you know that things can change very quickly and quite unpredictably. In short, it's no slam-dunk that American Capital Agency, Cypress, and Chimera can sustain their ultrahigh dividends for the next few years.  

But they may
These types of REITs are one of the most fascinating thought experiments in investing. To really get a handle on the situation, you have to not only make a call on the operations of these complex entities, but also make a call on the macroeconomic situation for the next few years.

There may be an opportunity out there for those who can work through these complexities, but this definitely should be in the "too difficult" bucket for my dad -- and for many of us as well.

In case these REITs do fall in that category for you, I looked for some other dividend candidates outside of the financial sector. No other stocks out there are yielding anywhere close to 20%, but I did find a handful that are yielding at least 5% and are currently easily covering those dividends with earnings. The stocks below are the only ones that made it through my screen for non-financials with market caps above $2 billion.  

Company

Dividend Yield

Payout Ratio*

AT&T (NYSE: T  ) 5.9% 47%
Sunoco Logistics Partners (NYSE: SXL  ) 5.7% 50%
Eli Lilly (NYSE: LLY  ) 5.6% 45%
Exelon (NYSE: EXC  ) 5.0% 53%

Source: Capital IQ, a division of Standard & Poor's. *Payout ratio is the ratio of dividends to earnings. The lower the better.

Now, if you've been paying attention, you know you shouldn't get too excited. Just as we did with the high-yielding REITs, we can poke some holes in each of these companies.

Every investment (including each of these four) has weaknesses, but savvy investors take the time to figure out exactly what those weaknesses are and determine if the market is overreacting to them.

Meanwhile, terrible investors can take something as beautiful as high dividend yields, misuse them, and ruin their returns.

To further you on your road to being a savvy investor, we've put together a free report on dividends. In it, our Motley Fool analysts have identified 13 dividend-paying stocks that are long-term plays. To download for free now, just click here.

Anand Chokkavelu doesn't own shares of any company mentioned, but he loves his dad. Motley Fool Options has recommended writing covered calls on Exelon, which is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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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 January 04, 2011, at 10:39 AM, stoxmri wrote:

    I agree with everything he said. Buying a stock like CIM is not investing, it's speculating that a set of conditions will remain favorable. But in this case we have alot of help! First we have a Socialist President whose policies are unpopular and deemed a failure. Nothing more from him will pass or work. On the other side we have infatuated Republicans rushing to Congress like a freshman to a sorority party with only one goal, to embarrass the Socialist even more. So who will craft intelligent fiscal policy to improve the economy and remove the ridiculous elements of the bloated health care payment reform bill? No one, so the only tool left is monetary policy which will force the Fed to keep rates low for at least another year.

    So my CIM dividend is likely safe for at least another 4 Q's and I don't care if it is 12 cents per Q or 16 cents per Q. In either case the stock is worth more than today.

    Investing in something that is in short supply (like intelligence in Congress or grades, theses and birth certificates in the white house) is a proven successful strategy. The biggest shortage for the next 10 years will be Yield, which will be umnercifully hunted down and captured by aging baby boomers who are desparate to replace W-2's with supplemental income. A 1 year target in excess of $4.50 plus at least 60 cents in dividends the next 12 months will be a great total return. Tell Anand to call his father and tell him the morons in Congress will come to his rescue.

  • Report this Comment On January 04, 2011, at 10:48 AM, EarnestEFaithful wrote:

    Mortgage REITs AGNC and CIM are highly profitable companies that return at least 90% of their quarterly profits to shareholders in the form of diidends. Their annual yields are currently 19% and 16%, respectively.

    Sure there is market risk, like any other stock, but look at the stock price trends of these two over the past 2 years: their charts look like bonds.

    I don't see a big downside unless there are major structural changes to Fannie and Freddie, which may be on the horizon, or the spread between 10-yr treasuries and mortgage rates contracts significantly (unlikely), or large nos. of folk prepay their mortgages (unlikely).

    Personally, I love companies that essentially pay me all of their profits in the form of cash every quarter, having invested disappointingly in those "other" companies for all these years.

    In this case, your Dad was right.

  • Report this Comment On January 04, 2011, at 11:29 AM, drbenson572 wrote:

    I would agree with Earnest. If an investor blindly invests and then goes on auto pilot, he/she deserves to get burned. Annaly (NLY) has been returning 15-18% for years and like other REITs is subject to the spread between cost of borrowing money (dirt cheap today) and buying MBSs. I keep an eye on inflation but all the pundits have been screaming about rising inflation but it's nowhere on the horizon. When I see it moving upward I'll decide on my Annaly and my Pimco bond funds, which are making 7-8% yields, and make a move. If you snooze, you loose.

  • Report this Comment On January 04, 2011, at 11:40 AM, DR1P wrote:

    Personally, I think the idea of refusing to invest in a company because its dividend is greater than x% (fill in your own limitation) is a bit simplistic and could keep you form making some good profits. Granted, keeping more of the money instead of paying it out in dividends would probably make these companies better off, but they don't have a choice of paying out less than the required minimum and maintain their REIT status. I'm not saying that any of the listed stocks are good or bad investments but, as with any investment, you need to look over the available information and determine if you think it is a good investment. Just because it "looks too good to be true" doesn't necessarily mean that it IS too good to be true.

    I have seen numerous finance gurus (or ones that thought they were) say stay away from anything that has a double digit dividend. "A double digit dividend is not sustainable". I just think back to the Huntsman shares (and a few others) that I bought when they were down to the point where the dividend was in the double digits. The dividends were just icing on the cake to go with the returns I got. Yes, they didn't sustain a double digit dividend... because the share price increased to where it was no longer in the double digits. I'm not trying to say that any of these are going to do the same, I just have a problem with what some people have as "hard and fast rules".

    My main problem with most REITs is that the dividends are classified as regular cash.

  • Report this Comment On January 04, 2011, at 3:55 PM, ffllooyydd wrote:

    I did my due diligence on CIM and am quite the contrary 'confident' in my purchase of 44,000 shares. I will be getting around $7,000.00 in the next few weeks. They have a strong, continual earnings record with continued dividend payout. When you are in your 60's and have been playing the market for more than 20 years you do get a good 'touch' on the market. Yeah, the guy who wrote this should listen to his elders. Do the research, and don't throw a couple high paying dividends into a skewed view that says they are dangerous or any such thing. Their outlook for the next near are a little too rosy, so there may come a dip in price, but they will keep churning out those dividends none-the-less. Happy New Year.

  • Report this Comment On January 04, 2011, at 4:22 PM, TMFBomb wrote:

    @DR1P and ffllooyydd,

    To be clear, my point isn't that dividends over a certain yield are always bad. Rather, it's that we shouldn't just look at a 20% dividend yield and buy in without figuring out exactly why that yield is so high and what the downside risks are.

    Fool on,

    Anand

  • Report this Comment On January 04, 2011, at 4:40 PM, paul7777777 wrote:

    Even if the earnings of CIM and other REITS will be less, they will still give a huge dividend compared to other stocks and bonds, so I don't think they will be less popular and maintain their value (of course in case of a global crisis they can also be affected temporarely). For retired people they give a very nice income.

  • Report this Comment On January 04, 2011, at 5:03 PM, Nrgyindependance wrote:

    @EarnestE..... Just a caution: the yields are not 90% payouts of "profits" but instead 90% +/- of free cash flow. There is a significant difference. REITS show negative profits but can still pay out huge yields. Thank the accounting rules for the confusion. But it is still a solid practice that has been inplace for many years.

    Also, all the talk about growth in REITS. REITS buy assets and derive interest income off the mortgages. There is no possibility of "growth" in the classical sense in that thay do not make a product nor offer a service which could grow over time. Once thay buy an asset the value can change and/or the interest collected can change with prepayments or foreclosures. But mortgages are guaranteed in the case of NLY. The only way to "grow" for a REIT is to issue more shares and use leverage to increase payout to investors. Which NLY has just done....so it is "growing".

    NLY is growing during a time of cheap interest costs and high cash yields. This is not the classic case of dilution either in that the money can be put to work immediately for an immediate cash return to shareholders. How long this gravy train will go on is anyone's guess.

    Having said all this, I am a long time owner of NLY and extremely happy with the results. Over the benefit of time the costs of money and yields average out regardless of economic scenarios for a sweet average yield.

  • Report this Comment On January 04, 2011, at 5:15 PM, docandjo wrote:

    Why not make hay while the sun shines. That 17% isn't too shabby. It sure beats 3-4%

  • Report this Comment On January 04, 2011, at 5:19 PM, jondee123666 wrote:

    Sounds to me like MF should consider a newsletter to cover high interest rate REITS, no?

  • Report this Comment On January 04, 2011, at 5:40 PM, rocket4th wrote:

    I gave a "Rec" in that yield-percentage is not always the answer. I have access to yield amounts and can sort for the hightest ones. I still need to be leary of the listing and do my DD. If I do speculate, it's certainly not a long-term buy and hold with no monitoring.

  • Report this Comment On January 04, 2011, at 6:08 PM, Fundament wrote:

    You are right. A high dividend yield does not necessarily mean that the company is on track. In addition, a high payout ratio is no reliable indicator. The main wealth contributor is growth. Growth makes you rich. I discovered some growth stocks that have best growth figures. In average stocks from my list grew with 20.82 percent in revenues over the past ten years and with 19.31 percent yearly in earnings per share. Here are my results:

    http://long-term-investments.blogspot.com/2010/11/11-high-yi...

  • Report this Comment On January 04, 2011, at 7:28 PM, NolAloha wrote:

    Let me say this about that: During the past 10 years, investing for a elderly parent, depending on dividends for living expenses, I have been reaching for yield, while trying to maintain safety of principal. CIM, NLY, AGNC, HRT, and many other high-dividend stocks have been in and out of the portfolio many times. People have been calling this the "Lost Decade", since the major indexes are at about the level they were in 2000. However, in this dividend-heavy portfolio, monthly payments have been sent ot totaling approximately 100% of the initial portfolio value, while seeing an increase in the portfolio of about 15%. Perhaps perceived problems with high dividends lie more with the investor than the instrument?

  • Report this Comment On January 04, 2011, at 7:32 PM, tweetybirdvicky wrote:

    Sorry to have to say - it is disgraceful the demeaning and ridiculing (and gross) descriptives of your father. Had he not done a decent job raising you and giving his best I am quite sure I would not be nauseated by the opening of this article. Next time you feel the need to write about pants filling - keep it about yourself. The upbringing you were short on appears to be respect and discretion.

  • Report this Comment On January 04, 2011, at 7:33 PM, Merton123 wrote:

    There is an old adage - If it is to good to be true then it is probably not true. Value Line has a screen for high yielding stocks and also places a number 1 through 5 for safety. The majority of the companies that have yields greater then 4% and a safety of 1 (the best) are the pharmecutical firms like Eli Lily which Anand talked about. The pharmecutical drugs are passing the dates that they are protected by patents and generics are coming in at reduced price cutting the future earnings streams of the pharmecutical firms. The firm who can replaced their old drugs with new drugs will see their stocks move from a low P/E of 12, 13 towards P/E 16, 17 generating a nice profit for the investor. If Anand could tell us which pharmecuitical firm will do this - his newsletter will be well worth the subcription cost. There is another old adage - "Their is no free lunch :)

  • Report this Comment On January 04, 2011, at 8:39 PM, Prarychkn wrote:

    One additional problem with REIT dividends you

    failed to mention applies specifically to CYS.

    A significant portion of their dividends actually

    consists of a Return of Capital to the shareholder.

  • Report this Comment On January 04, 2011, at 11:59 PM, Mary953 wrote:

    Anand,

    I invested in an REIT that had a great yield. I knew nothing about them at the time other than that they paid a fantastic return because they HAD to. Happily, I only invested a very small amount to see what would happen. I would have been well served to have asked the Fool Community first. If my kids knew as much about finance as you do, I would have asked them. As it was, the REIT converted to a stock, the 16% rate dropped to 1% then it dropped into the red, and I got out barely breaking even. If I had been (as I was for years) the sort of investor that took a broker's advice and then left my money to fend for itself, I would have lost every bit of it. Only the fact that I was doing the investing and the daily watching allowed me to salvage some of it. I have not returned to REIT's. I do not trust them. They are promises waiting to be broken, but I have never understood what happened or how I went wrong. Thank you for explaining it to me. Now it makes sense.

    And lighten up people! Age does NOT automatically equal wisdom. I am living proof! ;)

    Mary

  • Report this Comment On January 05, 2011, at 1:15 AM, Merton123 wrote:

    Vanguard REIT Mutual Fund VGSIX had a 28.30 return last year, and 10.45% since inception - better then the Standard & Poor 500 index. I believe that REITS are a better investment then gold and silver especially if we get hit with double digit inflation which will have an adverse affect on the stock market in the long run

  • Report this Comment On January 05, 2011, at 2:02 AM, awallejr wrote:

    Mary, REITS or BDCs can be great sources of income. Many got crushed in 2008 early 2009, like pretty much every company. However, if you believe in an improving global recovery there are many that are very undervalued now. The easy mony has passed where you could throw a dart at a stock chart and make money. Stock selection is now the rule. But once companies like FIG or NCT start resuming dividend payouts you will see considerable capital appreciation as well.

    i blogged about BBEP, for example, where they suspended their dividend and suggested people buying into it as a potential double since I submitted their dividends would be restored. They were and the stock did basically double.

    The author is right, however, in not assuming a stock's high dividend payout is safe. But looking at the reverse, a stock NOT paying a current dividend which may eventually pay one is a potential winner.

  • Report this Comment On January 05, 2011, at 9:21 AM, TMFBomb wrote:

    @tweetybirdvicky,

    Let me be clear that I greatly respect my dad. He has lived the classic immigrant tale, coming to this country with nothing and pursuing his dreams with exceedingly hard work. I tell him often that nothing me or my sister will ever accomplish in life will exceed what he's done.

    He has a great sense of humor and any mild fun I'm poking at his investing prowess here isn't meant to denigrate him...it's meant for him to laugh along with.

    @Mary953,

    Thank you for sharing your story.

    There are certainly dangers in all individual securities, including REITs. It's a separate investing discussion, but I think almost everyone is best served having a base of buy-and-hold index ETF's or mutual funds as the base of their portfolio.

    Even though I like to ferret out values and buy individual stocks, my non-401k portfolio has a base of Vanguard index ETF's at its core.

    Fool on,

    Anand

  • Report this Comment On January 05, 2011, at 9:32 AM, pogicraft wrote:

    misleading -- dividends don't ruin returns, amateurs jumping on the bandwagon ruin returns.

    Most dividend stocks are great-- like REITs and Energy companies don't really have much use for extra cash as they don't have to do research, expansion, and often times advertise (at least compared to B2C companies) so instead of them putting the money in some investment brokerage to idle away the years, they give it back to the stockholders.

  • Report this Comment On January 05, 2011, at 11:15 AM, Natolx wrote:

    Part of the reason why dividend yields are so high for REITS is that their money isn't taxed twice, its only taxed once. No one seems to mention this in their articles.

  • Report this Comment On January 05, 2011, at 1:05 PM, rpgizzle wrote:

    Even this picks are average at best, stick to the Aristocrat Index in the S&P 500. 42 companies that have consistently increased dividends over the past 25 years (very hard to do). Just think about all the economic uncertainty that has plagued us over that time period...oil, recessions, credit crises....

    Did i mention that these companies have outperformed the index by 4% the last 5 years?

    Strong business models, strong managment, competitive advantage, and fiscal discipline. They get my vote.

  • Report this Comment On January 05, 2011, at 1:13 PM, megastockmaster wrote:

    Yield is a percent of dividend payout against current share price.

    I've found that discussion of yield (%) is kind of meaningless. Yes: 20% yield is exciting or frightening or whatever, but has limited use in discussing a company and its stock.

    The premise that you should carefully evaluate every company you invest in seems overly simplistic, though. A waste of page space.

    This article could have benefitted from careful evaluation of the business model of REITs and BDCs, explaining how they cover [or don't] their high dividends.

    Otherwise a simpleminded gloss appears to reach the equivalent level conclusion that REITs and thei similarly structured BDCs [RICs] are mostly complicated Ponzi schemes.

    This is doing a discredit to your audience.

  • Report this Comment On January 05, 2011, at 1:58 PM, jm7700229 wrote:

    Let's see. We shouldn't invest in high yield REITs because this is speculating on future returns. According the the MF Stock Advisor for this month, we should be willing to pay a P/E of over 50 for Amazon because they are innovative and will eventually justify the price. This is not speculating. Hmmmmmm.

    I buy a REIT today and it pays me 17%. It doesn't grow in value. I buy Amazon at P/E of 50 and it pays me nothing. I hope that in 5 years it will be earning enough to justify today's price. This makes no sense to me whatever.

    Now the high yielding examples in the article above: if they paid out 90% of their earnings, their dividends would still be far less than GNCY or CIM and they wouldn't grow either. Hmmmmmmm.

    I don't bet my retirement on any investment category, but I intend to enjoy the high returns from REITs for a couple more years. While I'm a big believer in "buy and hold" and have done well with it, I also believe in "making hay while the sun shines." It's shining now on some REITs.

  • Report this Comment On January 05, 2011, at 3:35 PM, PEStudent wrote:

    I looked at AT&T and saw that the earnings, revenues, cash flow, and dividends have been increasing steadily throughout the 2000's. From 2005-10 the 5.7% dividend has increased at a 5.5% annual rate. Earnings growth was 8% the past year and projected as 9% next year. I joined the AT&T DRIP and will let the dividends compound, although the fees will reduce my dividend return to 5.4%, that's ok with me.

  • Report this Comment On January 05, 2011, at 4:25 PM, Borbality wrote:

    This doesn't really say why "Dividends Ruin Your Returns." It says why blindly chasing high yields is bad, but it doesn't say why dividends ruin my returns. I think it's always solid advice to pick high quality companies that historically and prudently raise dividends. Sure it's better to find the 1000% gainers, but for people like me with a weak stomach, I'll be glad to make money slowly and surely over the next 50 years or so of my life instead of waiting for the big one to finally pay off.

  • Report this Comment On January 05, 2011, at 4:27 PM, Borbality wrote:

    and yes I'd like to see more about AT&T's problems mentioned at the end of this story. It seems too good to be true with such a high yield and low P/e (low expectations aren't really a good thing tho), but I got a bad feeling I'm missing out by not getting in on this one.

  • Report this Comment On January 05, 2011, at 5:26 PM, RudeRich wrote:

    I don't get the purpose of this article other than "invest wisely."

    I invested years ago in a REIT that specializes in assisted living facilities. Why? Because it makes several million $ per employee annually, its debt is very low, and the U.S. has an aging population that will need such facilities in the future.

    I dollar-cost averaged in over several years by using buys and dividend reinvestment and despite the fact that the stock has an 8% dividend yield for those paying the current price, my dividend yield is over 22% and has been for about five years. PLUS I am up 400% on the stock price.

    So what gives with the fear of REITs and or high dividend stocks as part of a diversified portfolio?

  • Report this Comment On January 06, 2011, at 8:17 AM, TFMiner wrote:

    What I usually do, is use http://goo.gl/3y8uz to check dividend yields and then I don't go for the highest yields (which usually aren't sustainable, or just caused by a low stock price), but I look in the 6-8% range. I try to find the stocks that have taken a hit, but where the future seems to be more positive.

  • Report this Comment On January 06, 2011, at 12:12 PM, mikecart1 wrote:

    Another poorly researched and contradictory article. If these articles were in regards to bodybuilding, one day an article would say running for hours is a good way to burn fat and then another article would say HIIT is a good way to burn fat.

  • Report this Comment On January 07, 2011, at 12:43 PM, foxhop1 wrote:

    I like the fact that insiders are purchasing CIM and that the chart is building a long base. In those ways, CIM is the inverse of NLY, which is not being purchased by insiders and has appreciated substantially from its low. Curiously, I understand that the same people manage both; it would seem that they like CIM better, so I have long-term puts as a hedge on NLY (puts have been cheap) and own CIM long.

  • Report this Comment On January 07, 2011, at 1:37 PM, 11x wrote:

    This article could just have been titled why low PE stocks ruin your return and substitute every "high dividend yields" for "low PE multiple."

    Yeah, if you don't know what y ou're buying and base your decision on a high yield, you're going to end up in disaster. This author's father didn't know what he was doing.

  • Report this Comment On January 07, 2011, at 1:48 PM, jtheoldgolfer wrote:

    For the past 10 years I have listened to advisors, fools, cfps, you name it. All I ever really look at is monthly statements. The results of buy and hold low dividend issues has beena whopping2.3% per yr. In the last 2 years my reits have averaged 10.5% and the doomsdayers keep saying "you"ll see". Until the housing situation gets significantly better Reits are safe. Nly trades big volume for a disaster reit, are they all wrong? Sorry, Anand, cannot agree.

  • Report this Comment On January 07, 2011, at 1:49 PM, Ironbob wrote:

    Couldn't you have summed this up in just three words, "Do the research". I mean seriously, the title alone doesn't make sense. Dividends are an excellent compound interest tool, something you completely left out.

    Time to do a little math folks. I have a self-managed 401K with auto-rollover per quarter which means that whenever the dividends pay, that money is rolled over to buy shares.

    When done this way, the initial price point you bought the shares at begins to be absorbed more and more as more shares are added to your total each quarter and THOSE shares will earn dividends as well next quarter.

    Sorry but there's nothing more comforting to an investor than compound interest.

    I understand your point about going after that which seems too good to be true but think about writing about what I just discussed here. That's far more valuable.

  • Report this Comment On January 07, 2011, at 1:59 PM, Richh100 wrote:

    I agree with the other people who have posted before me. I have owned AGNC since it's IPO and have watched it closely for any signs of weakness. However, because of the policies instituted by our genius president (at least he thinks he is a genius), companies like AGNC, NLY, CIM and others have done very well and look to continue to profit themselves and their stockholders. As long as this continues, I will be the lucky owner of high dividend paying company. I am not stupid enough to think it will continue indefinately, so I will watch and keep myself informed - ready to sell if necessary.

    I would like to note that the Fool has listed stocks that are considered safe that yield 5% or so, but there are others that financial experts never mention and that is preferred stocks. I own approx 60 preferred stocks with an average of 7% yield and most are below the call price of $25. I consider these a good catch and will buy more as I can. If you were to have purchased these a year or more ago, you could have obtained yields of over 10%. According to experts, the high yields would have made them too risky. Glad I ignored the experts.

  • Report this Comment On January 07, 2011, at 3:51 PM, glenrgraham wrote:

    I agree that dividend yield is only one factor to consider and should never be the sole factor to consider when buying stock. The real issue is what is the real reason that you are buying stock? Some people say before you invest to consider why you are buying the stock and what would cause you to sell it in the future and what would cause you to buy more of it. Also, are your buying for long term reasons - such as the stock may go up in value to some extent over time and it may pay a dividend while doing so. If you cash in a stock, you will have tax issues. Because people have not fully considered why they are buying stock before they buy it, it is possible to make mistakes. NEVER BUY STOCK because there is a "buy" recommedation. Use your independent judgement and your own assessment. Large fund investors may drive a stock up or down even though it has 'real' value that has not changed. Stock can rise and fall independent of the 'real' value of the business. I prefer long term investments for about 3-5-10 years. I prefer some dividends but I am not greedy. Predictions of 'growth' can be wrong and are speculative.

  • Report this Comment On January 07, 2011, at 3:56 PM, MBRECRUITER wrote:

    LOL! I guess this old geezer had better get rid of all my dividend paying stocks and buy a lot of high PE stcks and "Hope" the pundits are right about the 2-10 baggers I'll be the beneficiary of. Bought BTO in 1994 (XBTOX for NAV) I wont say how much I bought but go look on the Yahoo site at the historical prices and dividend payout through good times and bad. Except for the crazy dividend it paid in Oct 1996 ($16.00), it has paid a consistent 8-12% annually with compounding it is at 10++ bagger. I guess I will see if I can sell my EVV, HPI and FAGIX before the closing belll and be happy that I got out with a compounded return of 100%+ of original investment. AMAZON you say-hmmmmmmmm

  • Report this Comment On January 07, 2011, at 4:00 PM, glenrgraham wrote:

    Ben Inker wrote, ". . .a crucial part of why investors find themselves swayed so much by the winners and losers of the last cycle is that they lack a strong anchor to their investment beliefs."

    The real answer to the investment world quest for the holy grail can be found inside each of us. To understand my supposition you must attempt to understand yourself. Ben Graham says that an "investor's chief problem - and even his worst enemy - is likely to be himself." Benjamin Graham: "The individual investor should act consistently as an investor and not as a speculator. This means.. that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money's worth for his purchase." Warren Buffett: "If past history was all there was to the game, the richest people would be librarians." Peter Lynch: "I've found that when the market's going down and you buy funds wisely, at some point in the future you will be happy. You won't get there by reading 'Now is the time to buy.' "

  • Report this Comment On January 07, 2011, at 4:21 PM, WorldClipsTV wrote:

    All generalizations are suspect including this one. Suppose one is stuck with an irrevocable trust that only allows removal of dividend income? What is wrong for one investor may be right for another.

  • Report this Comment On January 07, 2011, at 4:29 PM, ziq wrote:

    "If a 20% dividend can sustain itself for just five years, any remaining dividends or stock price is a pure return."

    My short answer: the logic is unassailable. The problem is, most likely, it can't.

  • Report this Comment On January 07, 2011, at 5:32 PM, TMFBomb wrote:

    @Borbality,

    Re: AT&T. You asked about potential holes in buying AT&T. One big hole we can poke is that its current earnings are temporarily high. This is due to a one-time tax benefit. Stripping that away, its P/E ratio would be in the double-digits, not the singe digits. And its payout ratio wouldn't be so low.

    Fool on,

    Anand

  • Report this Comment On January 07, 2011, at 5:56 PM, lease15 wrote:

    I have been enjoying a 15% yield from HTS for the past two plus years, with price appreciation from 21 to 30. Thank you very much, Hatteras Financial. As interest rates are increased from the Fed, I will sell. It's not rocket science, Anand.

  • Report this Comment On January 07, 2011, at 7:15 PM, Stokestack wrote:

    Considering the content of this article, it's STILL outrageous that Apple doesn't pay dividends.

  • Report this Comment On January 07, 2011, at 8:10 PM, cdb5556 wrote:

    Your 1st example, AGNC could have been purchased 5 years ago for 20 and sold today for over 29...and after collecting all those juicy dividend checks! Sometimes, you can have your cake and eat it too..if you are careful.

  • Report this Comment On January 08, 2011, at 1:11 PM, bernsteinbears wrote:

    Do we have the same father?

  • Report this Comment On January 08, 2011, at 1:38 PM, jpaa74 wrote:

    GREAT article!!

    I LOVE high dividend yielding stocks, but if it pays more than 7% I get suspicious, especially if thepayout ratio is over 60% of earnings.

  • Report this Comment On January 08, 2011, at 5:14 PM, TMFBomb wrote:

    @bernsteinbears,

    I hope not...otherwise Dad and I are going to stop talking stocks and start talking history!

    Fool on,

    Anand

  • Report this Comment On January 09, 2011, at 10:18 PM, MarionContrarian wrote:

    Quite a few comments here, but I didn't see any mentioning the use of stop loss orders. Take the extremely high-yielding AGNC, currently (price is $29.47, as of Jan 9, 2010) yielding 19%. The stock is in a nice rising channel, and buying the stock after it falls at the next ex-dividend date will provide a nice entry point with a reasonably tight entry stop. Back that up with a trailing stop that is somewhat greater than the September high minus low of $2.47(or, more actively, tracks some delta below the lower band of the channel) will provide an investorwith the potential for reaping the high yield while getting stopped out when interest rates rise to the point of being detrimental to the position.

    Alternatively, one could swing trade the band and potentially get even higher returns, protecting gains using stops as described above.

    DISCLOSURE: No current position, but considering either (or both) of the strategies above at the next ex-dividend date.

  • Report this Comment On January 10, 2011, at 2:05 PM, flyfisher5656 wrote:

    So here it is, until this administration un teathers the fed to raise interest rates and actually let the market charge meaningful interest rates that are realistic, these REITS will continue to gorge on cheap money, as well as a BUYERS MARKET in the rreal estate market. Lets do the math!

    Interest rate, what money costs, less than 2%

    Real Estate values, down 25-60% depending on where and what. Wow, no wonder AGNC pays 19% using Federally insured mortgage securities! This is a no brainer until rates and inflation as well as real estate numbers begin to rise. By the way, look at the history of ACAS for the last three years because this can happen when the target is strickened assets under pressure. ACAS is run by the same folks that run AGNC.

    In closing, keep an eye on your money because someone else will and is.

  • Report this Comment On January 10, 2011, at 4:37 PM, dansocko wrote:

    The tens of thousands of NAIC investor clubs have members who use a software program to assist in evaluating stocks. When completed a primary ingredient is "total return", a combination of share appreciation and divident yield. Share appreciation can be neutral, negative, or positive.

    Neutral is the lease likely outcome, so it behooves us to judge the worth of dividend return in the context of likely share appreciation. It is amazing how many discussions about the worth of dividend investing assume neutral share appreciation at worst. It say this having held D for 30 yearly, dripping and monthly investing for most of that period.

  • Report this Comment On January 10, 2011, at 8:43 PM, bobmar46 wrote:

    I have been primarily investing in dividend stocks since 2003. Seldom do I seriously look at anything with a yield below 8%. Since 2003 my average annual return (including dividends) has been 14.5%. During that time my yields have averaged 8.9% and average annual growth in stock value has been 5.6%. During that same period the average growth in value of the Dow, S & P and Nasdaq has averaged 3.5% a year. It is likely that these returns would be higher if not for a meltdown during the period.

    I do not at all agree with the concept that high dividends have to hurt growth. They have not hurt my growth and total returns. As with any type of investing there are some individual examples that could be used to make a case against that type of investing. Being selective is important as is some rotation. Some stocks that once were very high yielding stocks have appreciated so much that their current price dividend yield is now low. That is a good problem to have as frequently the investment can be rotated into something else with growth potential that pays a higher current price yield.

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