| Why Dividend Investing Alone Is Not a Good Strategy | | By Dr. Steve Sjuggerud | | Monday, April 4, 2016 |
| Dividends… REAL CASH PAYMENTS from companies… this is what you want – right?
That's what you've been told. But is it true? Are dividends REALLY what you want?
Does a strategy of buying high-dividend-paying stocks outperform the markets?
Is this a good value-investing strategy to follow… or is there something better?
I will quickly answer those questions for you today. You might be extremely surprised by my answers…
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First off, yes, a "dividend strategy" can outperform the markets…
Plenty of research shows that different strategies of buying high-dividend-paying stocks have beaten the overall stock market over the long run.
The thing is, as my good friend Meb Faber pointed out recently, the outperformance isn't all that great. You can do a lot better…
Many other value strategies perform a lot better than dividend strategies. After doing his homework, Meb's conclusion was simple, but profound:
| Value investing and dividend investing – while often confused as the same thing – are actually distinct strategies. And more times than not, value wins out. |
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Let me quickly share a couple specifics…
Here are the results of Meb's testing going back to 1995, in their most basic form:
| Investment Category | Annual Gain | | An index of the 2,000 largest companies | 10.0% | | The top 100 dividend payers each year from that index | 10.9% | | The top 100 "best values" each year from that index | 20.9% |
The last category – the "best values" – is simply the cheapest stocks based on the four best-known measures of value other than dividends: the price-to-earnings (P/E) ratio, price-to-book-value (P/BV) ratio, price-to-sales (P/S) ratio, and EV/EBITDA ratio (a company's enterprise value divided by earnings before interest, taxes, depreciation, and amortization).
The conclusion from these numbers is extraordinary: Dividend payers beat the overall index by a bit… But the other "best values" beat the overall index by a lot!
Why? One reason, according to Meb, is that high-yielding companies are often "junky" today:
| The top decile of dividend stocks is the highest yielding for a reason – they are junky companies that often have lots of debt and high payouts. So despite the fact that dividend stocks beat the market, there were much better choices if you wanted to find "value." |
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So… what should we do with dividends then? Meb shares an excellent conclusion:
| If you have to focus on dividends, you MUST include a valuation screen or process to avoid high yielding but expensive, junky stocks. |
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In short, don't be tempted by high dividends alone. You could be looking at expensive "junk." The other tried-and-true value measures perform much better.
I've just scratched the surface on Meb's conclusions about dividends today…
You can read his whole article on the subject here.
Check it out.
Good investing,
Steve |
Further Reading:
Last week, Steve wrote "if you've ever thought about buying a place in Florida, now is your moment." As he shows, the value for your money is incredible today. Learn more about this idea here: You Haven't Missed the Boom in Florida Real Estate. Steve also recently wrote about the big upside in Hong Kong stocks right now. History is pointing to further gains. Find out the easiest way to capitalize on this idea right here. |
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