Dividend Journey 005: You can only sell once

So I was looking at articles around this time. As I said, I had been reading articles about the big bank I was working at. This led me to look at articles about other big companies as well.

A few years before this dividend taxes were cut. For a long time I could never understand what the big deal was. According to Yahoo Finance, a lot of stocks were yielding 2%. That was what bonds were yielding. What’s the big deal? Stock prices were going high back then. Not as high as during the 1990s, but still pretty high.

I have since come to know that dividends were a large part of the return of stocks, and there were periods in which not paying a dividend was not the norm. I think our perception was distorted by the capital gains/price model of stocks. Even when I was young, people would say the way to make money in the stock market was to buy low and sell high. Then the dot-com boom really changed people’s perceptions. Stocks were doubling in a year. Why bother with a 2-4% yield?

At some point I started reading about the Greater Fool Theory: You buy something with a sky-high value hoping to flip it to someone else. I think I first came across this term when the commodities, stock and real estate markets were doing well. Then in 2008 just about every market crashed at the same time.

So active investing was no good, and the indexes were tanking. Aside from hoping to live looooooooong enough to make it back, was there another way? Depends on how you actively invest.

As I said, I was reading articles about large companies. There was one on the Motley Fool called The Secrets of 9-Figure Fortunes. The article (and others that I read, some of them on The Motley Fool) talks about buying stocks that pay dividends and re-investing the dividends.

I knew about compound interest. I also knew about the Rule of 72. A stock paying 2-3% would take a long time to provide income from just the dividends without selling any shares.

But the articles I was looking at talked about stocks that not only paid dividends, but increased their dividends over time. Some of them increase their dividends every year. So think of it as better than compound interest: compound interest with an increasing interest rate. So the yield could stay at 2% if the stock price increased with the dividend payout. As the price goes up, the payout also goes up.

At some point I read about the S&P Dividend Aristocrats, and later the Dividend Achievers. The Aristocrats are stocks that have increased their dividends every year for at least 25 years.

Stocks hit their low in March, 2009. Some of them were down 50% from their highs, even some of the Dividend Aristocrats. If you were relying on price and hoping to sell shares to get by, you had a hard time. But the Dividend Aristocrats kept on paying out more money. So I started looking at the financial statements for these companies on Yahoo Finance and for the most part I liked what I saw. (A couple of the companies I did not buy shares in later cut or did not raise their dividends.) I figured if a company was raising dividends while the world was ending, it was probably a safe bet.

I have moved from a capital gains/price model to a cash flow model. Granted, it takes a lot of cash to have a decent cash flow. I think relying solely on price is also a form of the Greater Fool Theory, a lighter version of someone who intends to flip. We had two crashes in a decade. Relying only on price is stupid. Someone described it as sawing off the tree branch you are sitting on. One issue with the price model is that you might not get the price you need when you need it. Plus by definition the only way you benefit from an asset with no cash flow is by selling. So you only benefit by owning something when you stop owning it.

And you can only sell once.

Dividend Aristocrats is a probably a trademark of S&P. Dividend Achievers is probably a trademark of Indxis. This site has a disclaimer.

Post created on 2013-01-23_11:09:59, last modified on 2013-02-09_12:10:10

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One Comment

  1. thanks for sharing such great article. i appreciate the post. keep posting more.

    comment edited by Everyday Freethought