Tuesday, August 31, 2010

Dividends Schmividends...

If someone gives you the advice to purchase stocks because their dividend yield is high....please run far, far away.  This rationale is a terrible reason to buy stocks.  It has been proven that Stock yields do not have a positive correlation with stock returns.  Yes, stock prices can go lower and dividend yields can go higher.  Cheap is a relative term...anyone remember 2008???  It will forever be etched in my memory and taught me to question everything and everyone...because the smartest of smart money saw their portfolio's Halved!

Let's look at 2010 so far and if you would have taken this brilliant strategy for face value at the end of last year.  Let's use the Dow Jones Industrial Average as a Broad index strategy.  If you would have purchased the Dow at year end '09 for that irresistible yield of 2.45%....today the Dow is down 4% Year-to-date...but wait you've gotten paid 9 months of dividends or 1.83% (9 divided by 12 times 2.45%)....so now your only down 2.16%....great trade!  And if the market continues to fall....that 2.45% dividend will surely keep my porftolio afloat....or will it?

Let's look at a few of the DOW companies for this year, just incase you would have gone the single-security route instead of the overall index.  Here's a quick example from a few different industries. Pfizer, Exxon Mobil, United Technologies, and Johnson & Johnson, which are all great dividend paying stocks.  After including the 9 months of dividends in their performance, these stocks are down respectively; -9.15%,
-11.05%, -4.25%, -8.55%.  Makes me say hmmmmmm....

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