To What Point Are You Blind When Looking At Your Dividend Stocks?
Have you ever heard of what investors call the “value trap”. A value trap happens when a stock is trading at a very appealing P/E ratio. Investors think they have found the deal of the year and they buy it without thinking further. The problem is that sometimes, the stock is a value trap: it’s worth a lot today, but the economics around the stock will eventually lead the company to be less profitable. This is why the P/E ratio will never go higher. Investors are then stuck with shares trading at a low P/E ratio but they will never catch up and go back to a higher multiplier. This is the value trap. Now, there are also dividend traps!
Dividend Investing is definitely one of the most popular and successful ways of investing. But it doesn’t mean that it works all the time. The whole point of dividend investing is obviously to get paid regardless what is happening in the markets. Some investors are so used to receiving their dividend distributions that they forgot they don’t own certificates of deposit and they are not receiving interest. Dividends are not 100% secured. In fact, dividend investing can also bring you big losses. There are some pitfalls you must avoid during your dividend investing journey:
#1 The High Dividend Yield Trap
If you have been following this blog for a while, you should have learned that the dividend yield should not be a factor in your investment process. Actually, as long as the dividend yield meets a minimum requirement (mine is set at 3%), you should not prefer a stock because it pays better than another one.
The high dividend yield trap is caused by greed. Investors are nostalgic from the time when we used to have Canadian Oil Income Trusts paying 8-9% with steady monthly distribution (anybody still hold ERF?). If you are still looking for high dividend paying stocks, you are heading towards the high dividend yield trap. This means that you buy the stock for its distribution. Unfortunately, there is a small print at the bottom of your trading slip: it says that the stock is unlikely going to continue paying its high dividend!
In the current market, there is one reason why a stock would pay higher than 5% in dividend; it’s because the dividend payout is not sustainable. If the market doesn’t think that the company will continue to pay its dividend, it starts selling the stock. The price goes down and the dividend yield goes up by default. If the dividend yield has increased significantly over the past 12 months and it’s not because the company is increasing its dividend, you are in a high yield dividend trap. Here are a few stocks that may represent a trap:
| Ticker | Name | Price | Dividend Yield | Payout Ratio | |
|---|---|---|---|---|---|
| AGF/B | AGF Management Ltd | 11,9 | 9,08 | 88,59 | |
| FRU | Freehold Royalties Ltd | 19,42 | 8,65 | 182,72 | |
| MKP | MCAN Mortgage Corp | 13,15 | 8,09 | 103,68 | |
| VSN | Veresen Inc | 12,87 | 7,77 | 302,64 | |
| PWT | Penn West Petroleum Ltd | 13,68 | 7,89 | 79,31 | |
| BA | Bell Aliant Inc | 24,95 | 7,62 | 132,35 | |
| BNP | Bonavista Energy Corp | 18,23 | 7,9 | 145,81 | |
| FN | First National Financial Corp | 16,85 | 7,42 | 164,75 | |
| AFN | AG Growth International Inc | 33 | 7,27 | 122,78 | |
| PBN | PetroBakken Energy Ltd | 12,45 | 7,71 | 85,88 | |
| FC | Firm Capital Mortgage Investment Corp | 13,26 | 7,06 | 100 | |
| US Stocks | |||||
| Ticker | Name | Price | Dividend Yield | Payout Ratio | |
| FSC | Fifth Street Finance Corp | 10,11 | 11,37 | 271,27 | |
| HRZN | Horizon Technology Finance Corp | 16,38 | 10,99 | 81,69 | |
| CNSL | Consolidated Communications Holdings Inc | 15,86 | 9,77 | 175,49 | |
| TCRD | THL Credit Inc | 13,8 | 9,28 | 170,46 | |
| CLCT | Collectors Universe | 14,59 | 8,91 | 197,16 | |
| ARCC | Ares Capital Corp | 16,63 | 8,9 | 90,46 | |
| NTLS | NTELOS Holdings Corp | 21,2 | 7,92 | 204,45 | |
| BNPUF | Bonavista Energy Corp | 18,6379 | 7,85 | 145,81 | |
| PWE | Penn West Petroleum Ltd | 13,61 | 7,74 | 79,31 | |
| NYB | New York Community Bancorp Inc | 12,98 | 7,71 | 91,02 | |
| BLIAF | Bell Aliant Inc | 24,957 | 7,61 | 132,35 | |
| CRRC | Courier Corp | 11,12 | 7,55 | 7575,37 |
#2 The Being Paid To Wait Trap
We often hear about the good side of dividends during bear market as you are being paid to wait. We all know it’s not the right time to sell when the market is down. While your stock might take a 15% slump, you still earn your juicy dividend of 3-4%. This reduces your paper loss and encourages you to keep your stocks longer. But is the distribution enough to keep you waiting five years?
Pfizer (PFE) is a good example. Over the past 5 years, the stock has generated a big 1.66% investment return (dividend excluded) and over 10 years; we are at -17.91% (as at July 31st). Is the 3.64% dividend distribution enough to wait that long? It’s even worse in the case ofPFE since they cut their dividend back in 2009 during the financial crisis.
Closer to my portfolio, my recent experience with ZWB proves that the dividend yield is not enough to keep you waiting. After a year, I lost money on this trade while making a juicy 8% dividend yield. However, when I combined my dividend payout with the portfolio value, I was still at a loss. I sold ZWB and bought STX (Seagate Technology) instead. This is how I made by my money back in just three weeks. Will I continue to ride STX now that their latest results missed analysts estimate for the first time in 5 quarters? That is a pretty good question!
Because we buy dividend stocks for dividend growth.
Because we buy dividend stocks with a long term view.
Because we get paid quarterly for our patience.
Dividend investing also causes procrastination! We comfort ourselves as investors by thinking that we are not day traders and that we should buy solid companies paying steady dividends. This is why so many investors want to keep their investments for life. But the problem is that they keep the wrong stocks in their portfolio for too long.
Receiving a check every three months should never be a reason to keep a stock. Don’t become a lazy investor because you are watching your dividend yield more than you look at your portfolio value. You might be holding the wrong stocks that are vegetating around 1% growth while other companies are growing faster and still pay dividends. In order to not fall in the “being paid to wait trap” I suggest you reassess the reason why you bought your stocks on a yearly basis. If the reasons are not there anymore, there is only two options left; get stuck in the trap or sell!
Here’s a few examples of stocks with no returns over the past 5 years.
| Ticker | Name | Price | Dividend Yield | 5 year return | |
|---|---|---|---|---|---|
| MFC | Manulife Financial Corp | 10,77 | 4,83 | -67,2 | |
| AGF/B | AGF Management Ltd | 11,9 | 9,08 | -56,38 | |
| ERF | Enerplus Corp | 14,09 | 7,67 | -49,92 | |
| AAH | Aastra Technologies Ltd | 17,02 | 4,7 | -48,68 | |
| SLF | Sun Life Financial Inc | 21,78 | 6,61 | -43,69 | |
| ET | Evertz Technologies Ltd | 12,98 | 4,4 | -39,26 | |
| RET | Reitmans Canada Ltd | 12,23 | 6,54 | -35,65 | |
| BLS | Boliden AB | 14 | 4,17 | -34,24 | |
| TA | TransAlta Corp | 15,65 | 7,41 | -34,23 | |
| IAG | Industrial Alliance Insurance & Financial Services Inc | 22,35 | 4,38 | -33,79 | |
| GS | Gluskin Sheff + Associates Inc | 14,45 | 4,5 | -30,29 | |
| PWT | Penn West Petroleum Ltd | 13,68 | 7,89 | -29,51 | |
| US Stocks | |||||
| Ticker | Name | Price | Dividend Yield | Total Return 5 years | |
| AI | Arlington Asset Investment Corp | 22,36 | 15,65 | -70,67 | |
| PBI | Pitney Bowes Inc | 13,36 | 11,22 | -61,05 | |
| NAT | Nordic American Tankers Ltd | 11,7 | 10,26 | -54,14 | |
| RRD | RR Donnelley & Sons Co | 12,12 | 8,58 | -61,72 | |
| ERF | Enerplus Corp | 14,02 | 7,68 | -46,62 | |
| CRRC | Courier Corp | 11,12 | 7,55 | -59,91 | |
| LXK | Lexmark International Inc | 17,49 | 6,86 | -55,92 | |
| NTRI | Nutrisystem Inc | 10,485 | 6,68 | -76,44 | |
| SSW | Seaspan Corp | 15,49 | 6,46 | -40,8 | |
| SLF | Sun Life Financial Inc | 21,68 | 6,45 | -39,97 | |
| CHKE | Cherokee Inc | 13,4 | 5,97 | -40,26 | |
| AVP | Avon Products Inc | 15,49 | 5,94 | -53,4 | |
| GCI | Gannett Co Inc | 14,11 | 5,67 | -63,76 | |
| STRA | Strayer Education Inc | 72,66 | 5,51 | -46,33 | |
| AYR | Aircastle Ltd | 11,83 | 5,07 | -52,75 | |
| VALU | Value Line Inc | 11,86 | 5,04 | -63,74 | |
| MFC | Manulife Financial Corp | 10,72 | 4,86 | -64,97 | |
| NYX | NYSE Euronext | 25,48 | 4,71 | -60,03 | |
| GRMN | Garmin Ltd | 38,61 | 4,66 | -45,64 | |
| STFC | State Auto Financial Corp | 12,97 | 4,63 | -41,14 | |
| AP | Ampco-Pittsburgh Corp | 15,71 | 4,59 | -55,81 | |
| AM | American Greetings Corp | 13,29 | 4,51 | -38,48 | |
| SWY | Safeway Inc | 15,55 | 4,5 | -46,93 | |
| ANAT | American National Insurance Co | 70,43 | 4,37 | -42,04 | |
| HVB | Hudson Valley Holding Corp | 16,86 | 4,28 | -46,04 | |
| BANC | First Pactrust Bancorp Inc | 11,25 | 4,27 | -36,82 | |
| CMTL | Comtech Telecommunications Corp | 27,32 | 4,03 | -33,49 |
#3 The High COP Dividend Trap
This third trap was brought up in a comment from Richard on “When Do You Sell When You Make Money?”. He mentioned that he keeps a few stocks paying very high dividends based on their cost of purchase (COP). If you do a good job with your stock selection, you will eventually get stocks paying 8% to 15% dividend yield based on your cost of purchase. In fact, the most courageous of you who bought Canadian Banks back in December 2008 are probably earning 25% dividend yield on theirCOP! This, unfortunately, is quite an exception.
More realistically, if you buy a company like Coca-Cola (KO) which historically doubles its dividend payout every 6.5 years, you will be earning a 7-8% yield in ten years. Then the catch is similar to the one found in the “being paid to wait” trap. Would you take your steady 8% dividend yield from a company that might only go down or would you restart with a fresh company paying a *small* 3% dividend yield but which is very promising? For the record, I’m not saying that KO should be sold because it’s going nowhere; I’m just taking the company as a good example.
In fact, when you look at the dividend aristocrats you have great examples of stocks that are continuously increasing their dividend payouts but don’t necessarily provide capital gains to investors. Here’s a quick list of underperforming aristocrat stocks over the past five years that are providing highCOP dividend yield:
Cincinnati Financial Corp (CINF)
Pitney Bowes (PBI)
Sysco Corp (SYY)
Nucor Corp (NUE)
I totally understand that 8% yield is quite attractive. It’s actually the whole point of becoming a dividend investor; to seek dividend growth. You might have made a brilliant choice a few years ago, but it might not be the case today. Sometimes, you are better off selling your stock at profit than cashing your 8% dividend yield without real return.
Or you can also look at stocks that have a 3% dividend yield and a high 5 years dividend growth. I think that those 2 metrics combined could show some interesting picks:
| Ticker | Name | Price | Dividend Yield | Dividend Growth 5 years | |
|---|---|---|---|---|---|
| CEU | Canadian Energy Services & Technology Corp | 10,53 | 5,7 | 11,66 | |
| GRT | Granite Real Estate Inc | 35,8 | 5,59 | 19,26 | |
| BDT | Bird Construction Inc | 13,73 | 5,24 | 10,11 | |
| CTY | Calian Technologies Ltd | 20,67 | 5,03 | 21,44 | |
| SJR/B | Shaw Communications Inc | 19,57 | 4,96 | 16,37 | |
| CBY | Canada Bread Co Ltd | 43,25 | 4,62 | 35,59 | |
| GS | Gluskin Sheff + Associates Inc | 14,45 | 4,5 | 35,89 | |
| KMP | Killam Properties Inc | 13,05 | 4,44 | 19,97 | |
| CSU | Constellation Software Inc/Canada | 92,49 | 4,43 | 62,72 | |
| CJR/B | Corus Entertainment Inc | 22,69 | 4,23 | 13,34 | |
| CFW | Calfrac Well Services Ltd | 23,7 | 4,22 | 43,1 | |
| SJR/A | Shaw Communications Inc | 23,89 | 4,05 | 16,44 | |
| RCI/B | Rogers Communications Inc | 39,31 | 4,02 | 48,89 | |
| T | TELUS Corp | 62,62 | 3,9 | 10,63 | |
| GLN | Glentel Inc | 10,85 | 3,69 | 35,51 | |
| CMG | Computer Modelling Group Ltd | 18,48 | 3,46 | 34,23 | |
| LNF | Leon's Furniture Ltd | 11,95 | 3,36 | 15,3 | |
| NMC | Newmont Canada FN Holdings ULC | 46,55 | 3,07 | 23,83 | |
| TPX/A | Molson Coors Canada Inc | 42 | 3,07 | 12,33 | |
| US Stocks | |||||
| Ticker | Name | Price | Dividend Yield | Dividend Growth 5 years | |
| PNNT | PennantPark Investment Corp | 10,44 | 10,73 | 51,3 | |
| CLCT | Collectors Universe | 14,59 | 8,91 | 29,02 | |
| TCAP | Triangle Capital Corp | 22,93 | 8,72 | 65,81 | |
| NTLS | NTELOS Holdings Corp | 21,2 | 7,92 | 43,41 | |
| FFBC | First Financial Bancorp | 15,96 | 7,52 | 12,24 | |
| TAL | TAL International Group Inc | 34,15 | 7,03 | 34,12 | |
| CTL | CenturyLink Inc | 41,54 | 6,98 | 62,62 | |
| CFNB | California First National Bancorp | 16,24 | 6,77 | 19,05 | |
| OB | OneBeacon Insurance Group Ltd | 12,69 | 6,62 | 14,87 | |
| CLF | Cliffs Natural Resources Inc | 40,89 | 6,11 | 42,42 | |
| STRA | Strayer Education Inc | 72,66 | 5,51 | 27,49 | |
| CALM | Cal-Maine Foods Inc | 37,73 | 5,51 | 75,61 | |
| GRP | Granite Real Estate Inc | 35,58 | 5,47 | 21,47 | |
| BCE | BCE Inc | 42,54 | 4,97 | 11,27 | |
| SJR | Shaw Communications Inc | 19,52 | 4,97 | 19,04 | |
| COP | ConocoPhillips | 54,44 | 4,85 | 10,67 | |
| LEG | Leggett & Platt Inc | 23,18 | 4,83 | 10,17 | |
| ELRC | Electro Rent Corp | 16,76 | 4,78 | 51,57 | |
| SAFT | Safety Insurance Group Inc | 42,38 | 4,72 | 14,87 | |
| NYX | NYSE Euronext | 25,48 | 4,71 | 36,85 | |
| GRMN | Garmin Ltd | 38,61 | 4,66 | 26,97 | |
| MDP | Meredith Corp | 33,04 | 4,63 | 15,24 | |
| GHL | Greenhill & Co Inc | 39,72 | 4,53 | 15,39 | |
| AM | American Greetings Corp | 13,29 | 4,51 | 10,76 | |
| SWY | Safeway Inc | 15,55 | 4,5 | 20,36 | |
| LMT | Lockheed Martin Corp | 89,27 | 4,48 | 22,67 | |
| STX | Seagate Technology PLC | 30,02 | 4,26 | 17,75 | |
| UNS | UNS Energy Corp | 40,7 | 4,23 | 14,34 | |
| AVA | Avista Corp | 27,68 | 4,19 | 14,07 | |
| CA | CA Inc | 24,07 | 4,16 | 30,26 | |
| HAS | Hasbro Inc | 35,82 | 4,02 | 18,71 | |
| TWGP | Tower Group Inc | 18,64 | 4,02 | 49,63 |
It All Comes Down To Portfolio Management
I guess the hardest part of investing is not to buy or sell a stock but to manage the portfolio as a whole. It’s as important to select the right stock as it is to sell it at the right time. This is why a good review of your portfolio and the review of fundamental characteristics of each stock are important to be made on a regular basis. Don’t become lazy because you are getting paid. You have the right to grow your portfolio too!
Hi Mike;
I see you tok my comments to heart.
The stock that has done me the greatest good is IPL.UN.
The majority of this stock I purchased at $6.90 with some more @ $14.96
Based on the $6.90 COP I am making 15% on the dividends and 7% on the remaining.
So the stock is presently paying just under 5% in today’s value and I have triple my original value.
Hence the quandry, hold or sell (maybe a third to recoup the principle investment and hold the rest). But why sell? The dividends this stock generates (not quite 5K/yr) are re-invested into other dividend paying stocks so that my portfolio is more diversified. So I figure I am getting exceptional value and diversifying my portfolio at the same time. Why sell and re-invest at a lower rate when I can let the dividends roll in and diversify?
On a side note Mike I sold some of my holdings in Bell (had to make you smile). This clears my HELOC and leaves me with approx 15% gain on capital appreciation and dividends less HELOC interest (tax deductible). Now I will just have to pay Steve and Petit Jean come next springs income tax. Left over monies just might get put into horrible paying GIC’s. After all I am getting close to retiring and being 100% in the equities market is apparently a bad idea.
Read/check out your site almost everyday Mike. Gives me differnet view points than what I have and helps me make up my mind to pull the trigger or let it ride. HEE! I sold BCE. LOL
Hi.
Thanks for the informative post! It really helps to have such great insight. I do have one question, though:
You list the dividend yield for ERF at 7.67%, but I was wondering what impact their Stock Dividend Program has on that number. The ERF stock dividend program is similar to a DRIP, but in this case investors re-invest at 5% lower than the market price. How does that 5% discount figure into the yield, if at all?
thanks again!
Keep up the great blog,
Dave
Wow, talk about good timing, my inheritance (my Dad passed away about 6 months ago 100% DRIP stocks) and my portion was literally deposited into my account as I was reading this.
I’m planning on doing David Stanely’s BTSX (as a matter of fact started a blog to that effect) but what you wrote today has given me some food for thought. That and it will take me a while to digest everything here
Rob
Hey Richard,
I hope you didn’t take it personal :-). I thought it would be cool to cite a “real” example! I agree with yout that keeping a stock that has trippled in value + paying a 15% cop dividend yield is quite tempting. The fact that you are using your divdiend payouts to buy other stocks is very smart!
As for GIC’s, I would stay away from them. They don’t even cover the inflation. If you are about to retire, why not consider preferred shares (through ETFs or mutual funds) and a bond fund (that includes Fed bonds but also corporate bonds). I guess you will pay a little bit more in MER but you will definitely beat the 2.50% for 5 years you are going to get (assuming you are Canadian, heh? 😉 ).
Darn, BCE just announced a dividend increase 🙁 I’m not saying that BCE is bad, I just think that Telus is a better pick. Actually it has been a better pick for each of the last 5 years ;-D
Dave,
let me do some research and get back to you. I’m not sure yet.
Hey Rob,
I’m sorry for your loss 🙁
investing is definitely more complicated than simply follow a set of rules… Even dividend investing is more complicated than it seems sometimes! ah!
Mike,
Do you have any resources to determine yield on cost? Or is just going back to an excel spreadsheet?
@Evan,
I use good old excel sheet!
Hi Mike;
No, I did not take it personally at all. If I post then it is open to comment.
Dam! Sold BCE one day too early. But better to be happy with what you have than cry about what you missed. 15% ain’t all that bad.
One of the reasons I like BCE more than Telus (very simplistic I know) is that T is more expensive and the diivdend is less. So I could take the value of lets for fun say 1K of T shares and get a 3.8% div or I could take approx 2/3’s of the value in for fun lets say BCE and get a higher div and take the other third and diversify into something else. So I get two stocks to better weather the ups and downs and hopefully a better div payout to re-invest and diversify even more. A bit more transaction fee but can’t kick about $6.95 per buy/sell too much.
The other thing I mull about as well is that it is a lot simpler to make a 10% cap appreciation on a $10 stock than on a $100 dollar stock. At least to my thinking. SO the less expensive a stock is the easier it is to appreciate in value. Doubling a $2 stock is easier than doubling a $100 stock. Very simplistic but a certain logic to it at the same time.
Right now I think BCE is riding high on the Olympics. You see them plastered all over CTY (it is their network). Plus this additional div increase hasn’t hurt them either. But I will wait to see if there is a pull back. If there is then that HELOC is going to get wacked again.
Appreciate the advice about the ETFs/bonds. Will look into that. Especailly since this is outside of an RRSP. I guess I should try to diversify away from 100% equity investment.
Just to rant on a bit longer. I held out through the 2008/09 debacle. It all came back. I had some mutual funds managed by experts that didn’t do so well. They got switched out just last year to equities. I haven’t really gained anything significant in value on this but I went from a $3K in dividends in 2011 for 8 months to well over $5K so far for 8 months in 2012. What I am looking for long term is dividend pay out. I will only have RRQ (CPP) and OAS when I retire so I need to do it on my own. I am hoping to have over $30K in dividends per year when I retire (62/63). This would let me draw on them as needed without touching the principle and hopefully maybe even build on the principle (God bless BCE, RUS and IPL for hiking their Div’s). 2010 had me at $16K div, 2011 @ $24K and 2012 looks like well over $32K. This is with all div’s re-invested as well as maxing out the RRSP and TFSA (all equities) So it is not looking too bad as long as 2008 doesn’t come back too soon. It just might be possible to have sufficient div’s at 71 to pay out the minimum withdrawal rate (7.38% I believe) for a few years.
My.bank adviser asked me if I got nervous about using the HELOC for investments. I told him I was only nervous when the stocks were going down. LOL But at 3.5%, income tax deductible, with a 5% div (BCE) payout (taxable), it actually pays for itself. I pay the interest off myself so I figure my money is paying me maybe 3% (the extra dividends generated are taxable)
What the heck! The only RRSP I can really track is my LIRA and it will be 10years in MArch and is on thrack for between 8.5/9%. And that is with some Nortel in there as well. Should have bought a dividend paying stock. Kick my ass.
That was a long rant Mike
“I guess the hardest part of investing is not to buy or sell a stock but to manage the portfolio as a whole. It’s as important to select the right stock as it is to sell it at the right time. This is why a good review of your portfolio and the review of fundamental characteristics of each stock are important to be made on a regular basis. Don’t become lazy because you are getting paid. You have the right to grow your portfolio too!” These are among the wisest words I’ve seen on personal finance blog. Excellent post!
@mike thanks!
also since blogger doesn’t quite support trackbacks I’m giving you the proverbial tap on the shoulder that I linked your blog on mine
Also you gave me a lot of food for thought on this and will over the next few weeks comment on this very thing
still Sun Life, sheesh, right top of my buy list!!!!
Rob
Hello Mike.
I took a shot at calculating the effects of the 5% discount. Maybe you can critique my efforts – I am new to this kind of investigation.
I assumed 1000 shs of a fictitious stock, purchased at $10/sh. I held the price of the stock at reinvest time to $10, trying to remove any effects of market volatility. I think this means I allow market fluctuations of $0.09 per month. ie, the stock drops by $0.09 (the amount of the dividend) on the ex-dividend date, but climbs back to $10 by the next ex-date – in my assumptions/calculations.
This means, for a DRIP scenario, my calcs assume the purchase price when reinvesting the dividend is $10/sh. For an SDP scenario, this means the reinvestment price is 9.50/sh (to reflect the 5% discount to SDP participants).
I wont go thru my calcs here, but my results show a 12-month compounded return of 11.35% in the DRIP case, and a 12-month compounded return of 11.98% in the SDP case.
This difference doesn’t seem like much to me, I wonder if you came up with something different?
There is one sticking point that I think adds to the attractiveness of the SDP over the DRIP. That is the fact that SDP participants use the full amount of the dividend to purchase shares at the 5% discount. Because I am in the USA (or, because I am outside of Canada), ‘they’ withhold 15% of the dividend paid to DRIP-type participants. This means participants in the DRIP scenario buy 15% fewer shares with their reinvested dividend. Participants of the ERF SDP do not pay the taxes when the SDP reinvestment occurs, allowing them to buy more shares (approx 15% more) in addition to paying 5% less for those shares.
Interested in your thoughts/findings.
thanks,
Dave
Great article you wrote on dividend investing. I think that we should not invest in a stock just because it has a dividend or a great dividend. We do need to look further.
I tend to pick stock with a variety of dividend yields. What is important to me is a company’s ability to pay the dividends. I must admit that I care more about Dividend Payout Ratios based on cash flow. Also, different sorts of company can afford payout at different rates.
A lot of companies have lost money for shareholders over the past 5 years. I still have Manulife and Sun Life because I believe they will recover, just not soon. We still have a lot of problems and we still are in a secular bear market.
I also look at dividend aristocrats list and other such lists and you are right, you have to be careful. There are certainly stocks on these lists that would be bad investments. I like companies that grow their dividends and can afford to grow their dividends.
Hi Mike,
Great article. And a great reminder to keep your head in the game and not be complacent with past purchases, no matter how good they were a few years ago. I’m definitely guilty of #2, the being paid to wait trap. It’s very easy to rationalize, “Hey, I’m still getting my 3-4%” regardless of stock price and cap appreciation.
Rob
How do you calculate COP? if you have a formula or a google docs spreadsheet it might be a good thing to share 🙂
Thanks!
Finally someones taking about the high dividend yield trap. Thank you. Many elementary (so called) investors will gravitate towards higher yield dividends which has no baring on how the company is doing. I like your 3% threshold, very smart. I agree with your conclusion you come to. I now can send this to the people who still disagree on the whole high yield dividend.
Great read.
James
Hi Dave,
Thanks a lot for sending out that example, very appreciated!
I did do the calculations on my end and get a similar result, the difference is far from significant but would get a bit more important if the dividend yield did end up increasing. I would say though that getting close to 1% of annual return for the exact same level of risk seems like not much but it does add up over time:)
I wasn’t aware of the fiscal impact of the strategy. Are you sure though that you don’t end up owing more money at the end of the year because of it?
Thanks
I was interested and excited to see Killam Properties on your list of strong possibilities. My wife and lived in Dartmouth, NS for 18 months 2013-14 managing automobiles and apartments for about 120 full-time youth missionaries. We had some great experiences dealing with Killam … Great People … Great Company!