Is it just me or does this myth get thrown away too often? I sometimes feel like many investors, especially those trying to build dividend portfolios end up making a decision to go for dividend instead of growth. Each time I hear a comment from someone that decides to focus on yield it makes me cringe.
It Should Not Be A ChoiceYesterday, I took a look into RadioShack (RSH), a stock that pays a 12% dividend yield. That is great and I can understand how someone trying to build a high yield portfolio would be tempted to buy. A 12% dividend yield would certainly help to lift the overall yield of a portfolio.
It’s Not Just About YieldThe problem of course is that if you are receiving a dividend of $0.25 per share but the stock loses $0.40 in value during that same period of time, I think it’s fair to say that you do not have a winning trade. Stocks like RSH or FTR (which was at the top of the top S&P500 dividend stocks earlier this month) are attractive on the surface but I personally believe in buying stocks thaat have a stable or ideally growing underlying business.
Back To The Sustainable Dividend Portfolio ConceptIn the end, it’s about buying stocks that will be able to afford their current dividends and hopefully even increase their payouts over time. I understand how some investors have a focus on a higher current income. That is perfectly fine. I had discussed the difference between the current USDP and a higher yield one that would help someone that needs or wants a high yield. In both cases though, I’m always looking for high quality companies that are paying less than they are making and will be able to provide in the long term, companies like Pepsi (PEP), Aflac (AFL) and others.
There Is A DrawbackOf course, any company that pays out a dividend will usually see slower price growth. Part of it is because it is paying back some of its earnings instead of keeping it in its cash or reinvesting it. The other part is that in general, companies that pay out dividends are seen as companies that have less growth left. Part of it is a perception but there is some truth to it as well. However if you think about a company such as Intel Corporation (INTC), you will see that the company is not only paying out a decent dividend but has seen its stock price increase in the past few years.
What are your thoughts on this?