Investing Performance:

Paid to Wait

We hear it all the time. Diversify your portfolio by investing in dividend paying stocks and you will hear 'conventional wisdom' quotes like this one. Others are, 'I'll average down ...'; 'Lower stock price means higher yield ...'.

As a self-aware investor you know the issues with finding ways to explain poor performance that makes that performance feel OK. This one is pulled out all the time; you can hear it at least once a day on CNBC or Bloomberg. Generally, you can also conclude that the person saying it is losing money on the position.

We teach in our TAP training that a diversified portfolio is not just about the diversity of the companies you may choose. It is also critical to consider business models, sectors, industries and trade types. And, It is prudent to have some 'ballast' in the portfolio with dividend paying stocks. Dividend paying stocks tend to be the go-to equities during market declines. They may also attenuate the impact of market corrections.

So, yes, we feel strongly that some significant percentage of your portfolio be placed in dividend paying stocks. Our Performance Coach software can help you identify such companies in a convenient way. Some things to look for:
  • Consistent payment and raise of dividend;
  • Higher than average yield (S&P 500 average yield is about 1.9%);
  • Growth
Some things to avoid:
  • History of suspending or cutting dividends;
  • Unreasonably high yields should cause some concern over sustainability;
  • Cash from operations does not cover capital expenditures and the dividend payout
There are some additional tips in The Motley Fool article Read This Before You Buy Dividend Stocks.

The thinking, of course, is that you will make some return on your investment even if the stock declines. Perhaps.

If the stock price plus commissions declines more than the dividend yield, you start paying to wait. Seems obvious, but rarely will you hear someone say it out loud. This is another case of the DISPOSITION EFFECT: resistance to action when an asset is declining.

There is no excuse for taking no action on a dividend paying stock as it moves downward to a point that the dividend does not cover the stock value loss. This only happens when the investor is hoping for a a change. That is not to say you have to sell, though you should consider that action. You just have to take some action.

Some possible actions:
  • Sell;
  • Buy an out of the money put under the current stock price;
  • Write a call against the long position;
There are other, more complicated choices but clear and simple usually wins the day.

Our training will provide you with processes and procedures that will enable you to identify the appropriate equities for your portfolio; expose techniques to manage the downside and provide timely performance data to keep you on track.

Like the saying goes, if you give a man a match, he can stay warm for a day; light him on fire and he'll stay warm for the rest of his life.