Investors don’t seem to think much about dividends. But in a sense, the dividend that a company pays can be the most important indicator of value that we have. For example, when interest rates are low, and bonds can’t provide more than 3 percent at best, and savings accounts give almost nothing, a stock that pays a dividend of 2 to 3 percent seems like a good investment.
But, people say, “I might get the dividend, but lose it all back in a decline in stock price.” Technically that’s true, but the fact that the dividend exists provides a very good hedge against much decline in the price of the stock. This is because if the stock price goes down, the percentage return of the dividend goes up, and if the percentage return gets higher than other stocks of equal quality, lots of buyers will come out of the woodwork and drive the price back up.
But, or course, that depends on the financial strength of the company. Last year, as a test (my wife says a “lark”) I bought four stocks that paid dividends between 9 and 17 percent just to follow them and see what happens. One is out of business. Two are limping along, but still paying a dividend. One is doing well and the price of the stock is up. But, overall, I am losing money on this test. And that’s what I would expect with low quality, high risk stocks.
But there are lots of stocks out there that are really solid and pay a nice dividend. One of these is Apple (AAPL), which, for a while, paid a dividend over 3 percent. Today the dividend is 2.5 percent, but that’s better than I can get at my bank. And if the stock goes down, the dividend itself will make it attractive to investors.
Sovereign Self Storage (SSS) has been a very profitable holding for me. True, it’s at a new high right now, and I might take my profit and run. But it still looks like a good solid buy, and it pays a dividend right now of 2.8 percent. If it dips I would buy it.
Aflac (AFL) is another solid company, and currently pays a 2.2 percent dividend. I bought it recently (along with Whole Foods, which does not pay much of a dividend) as a growth stock investment.
Another high yield stock is China Mobile (CHL). That company is a bit less solid that the others I’ve mentioned because it has a lot of competition. But there is a possibility that it will make some deal to represent and distribute Apple products in China, and that could be very profitable for them. In spite of a run-up in the stock, at today’s price it still pays a dividend of 3.5 percent. For a stock with significant upside, that seems like a good risk. I bought some.
If you are interested in taking advantage of high dividends, one way is to invest in one of the many funds that specialize in high dividend stocks. Cullin and JP Morgan are two sources that have been recommended to me.
Years ago I had a friend that was a very successful financial manager. His clients included a number of the royal families in Saudi Arabia and other Mideast oil producing countries. He only bought large cap stocks that had not only paid a good dividend for at least 10 years, but during that period the dividends had increased by a certain percentage. For a long time it was an amazingly successful strategy.
Then came the hi-tech bubble, and the market shifted from solid large-cap stocks to high-risk start ups with huge upside potential — and huge potential for you to lose all your investment. My friend’s strategy was no longer mainstream, as other managers showed astronomical returns.
This might be a good time to revisit his strategy. That’s not to say that the tech sector is not good. I think this is a good time to invest in it. But don’t buy stock into just one company: I’m investing only in the QQQ index to reduce the risk of a big loss.
Finally, a couple of miscellaneous observations. I’m seeing more warnings about volatility between now and the end of the year. So this might be a good time to hedge your portfolio with short-term inverse options. For the long term I continue to suggest getting out of bonds. The bond market is not looking good for 2014.
For information about Merv Hecht and more details on the strategies and stocks he writes about in this column, visit his website at DoubleYourYield.com.