When I hear the phrase “dividends are passive income,” I vomit a little bit in my mouth. Passive income? A couple of percentage for assuming the risk on a security is not exactly appealing to me. I feel that the underlying security should always be the focus and that dividends are ultimately irrelevant. You shouldn’t be afraid to buy no dividend stocks.
Why dividends are irrelevant
It might be a shock to hear, but when a company pays dividends, they have less cash. It’s just crazy enough to be true.
When you buy a stock, you are ultimately putting your faith in the fact that the company will be successful. You are trusting that company as a shareholder. If the company decides that it is best to pay a large portion of its profits out in the form of dividends, then so be it. But if the company sees opportunity for that cash on hand, they shouldn’t be looked down upon for making business decisions. Maybe they decide to expand with that money into foreign markets or invest in better equipment at it’s factories, whatever the case, you have displayed trust in that company’s decision making. If the companies new decisions are successful, the stock is sure to appreciate to display that success.
That being said, if the company makes decisions you do not agree with, that is when you can choose to show your disapproval but selling the security.
Example of where dividend investing can go wrong
I read an article a few years back about ArcelorMittal (Symbol ADR) when it was trading for $30-40 a share. The article basically said the stock was off it’s high enough that it could potentially become a good dividend play. It was paying a little over 2% yield dividend wise at the time. The idea was simple, the stock was so far off the high that you could hold the stock, collect the dividend, and pray for a rebound. The only missing part to that plan was the rebound.
Not only did the stock not rebound, but it fell to about $15 a share. The overall decline since this article was probably about 50-60%. All for what? Annual distributions of $.64 worth of dividends?
People who don’t factor in the security itself into dividend investing, shouldn’t be investing.
The first argument I imagine coming from the opposition to this article is this, “But I still have the stock, I will continue to get dividends forever.. who cares about the stock.”
I wonder if Kodak Eastman Company (Symbol EKDKQ) shareholders thought the same thing as they watched their shares become drink coasters ($.25 a share, soon to be $.0).
Imagine you bought EKDKQ in 1992 and held it until today. Roughly $40 a share in 1992, you would have earned $22.22 in dividends (according to shareholder.com) but lost about $40 a share in value. That’s a loss of about $17-18 a share over 20 years! On top of that, $40 a share (used in example) was a relatively average price, it could have been much worse.
Lesson here, is that is it okay to buy no dividend stocks and that buying stocks with only dividends in mind is reckless investing.