I love receiving my regular dividend! That’s what we hear from many investors out there. “I never want to sell my dividend stock because it is paying a dividend and I don’t want to lose out on that.” Dividend stock holders love their stocks, and rightfully so. Dividend stock paying companies are typically ones that are usually managed well, are producing cash, and are thus able to pay a dividend. Companies such as Coca-Cola, Johnson & Johnson, and AT&T are all quite good dividend paying stocks and will probably be so for at least the near future, although the COVID situation may have them adjusting downward a bit. The problem is – that even 2,3, 5, 8 years ago there were plenty of stocks & ETFs still paying dividends but the amount has NEVER made up for their drop in share price. So you are stuck holding onto a “losing position” because you believe the dividend payments will help make up for that and that the symbol will rebound. That’s’ called a Buy, Hold & Pray model.
Markets and the economy can change and so do the results of companies. So let’s dive into the math around this to prove why you should never fall in love with a dividend-paying stock or ETF.
Let’s take IBM as our first example. It’s share prices still has NOT RECOVERED to its high of $176, when SmartStops alerted back in March 2017. So how many dividend payments might have been missed if you sold vs. held until today? Let’s see – that is 15 dividend payment @$1.50-$1.63 (so we’ll take $1.58 as in-between to use in this example). So per share that’s a total of $23.71 per share in dividend payments for over a 3 year period. Yet today, IBM is trading at the $117 level having never in the 3 years gotten back to the $176 level. So that’s a $59 Price Drop!
Bottom line – you’ve collected less then 50% of that price drop back and are still holding onto a stock where yes even if you haven’t sold it, you have lost. In fact by holding onto it for three more years, you’ve basically denied yourself an opportunity to move those investment dollars into a better appreciation asset . If you had a 500 shares of IBM, your $88,000 investment as of 2017, now resides at $58,500, so patting yourself on the back that you’ve collected a total of $11,605 over those same 3+ years may preclude you from the realization that it can take you another 9 years at current price levels and a quarterly dividend of $1.60 per share, to have made up that difference. Granted IBM’s price may appreciate going forward, but to what levels? The point remains – taking action when risk is elevated can pay off in much greater amounts then your dividend payments.
Let’s take another example – GD , General Dynamics. Here you could have sold on Febuary 2018 when SmartStops alerted you to elevating risk at $214.28. Now since that time, GD has been paid nine dividends of $0.93-$1.02 ($1.11 was the most recent dividend) , for a total dividend per share of $8.91. Since that time frame GD has yet to see the price recover to that high point, and most recently Is trading at $149 per share. That’s a price drop of over $65 PER SHARE! So holding on for a whopping $8.91 in total 2 year dividend was really the ROI one desires?
Let’s move that into the equation of say 100 shares. So your investment of $21,400 as of 2/5/18 has made you $1782 over the past 2+ years in dividend payments.Yet now your GD investment is only worth $14,900. So how many years if price remains depressed will it take you to make up for what you could have protected in the first place? At a continuing $1.11 per quarter dividen, that’s going to take you 14 years and 6 months to make up the difference. Of course GD can appreciate from its current price level, but it will still take you years where that money could have been deployed elsewhere.
That’s the problem with falling in love with a dividend-producing stock. And of course if the company runs into trouble as GD did and dropped it’s dividend payment to $0.01 for a bit, then the damage becomes even worse.
That’s why SmartStops,net can help ensure you take the action when needed so that you don’t end up in a Buy, Hold & Pray routine, wasting away your valuable investment dollars in an under-appreciating asset, that just because it is paying dividends you are going to hold onto. Learn when risk is elevating in your dividend-producing stock or ETF and then you can deploy a better Buy & Protect approach.