Wednesday, May 16, 2012

Dividends Aren't Forever

One of my goals is to build a portfolio of good dividend paying stocks to create a consistent stream of income.  Today's dividend cut announcement by J.C. Penney was a good reminder of this specific risk with all dividend paying stocks:  reduction or elimination of a dividend.  It was only 3-4 years ago that investors experiences large dividend cuts from previously consistently paying companies, such as J.P. Morgan, Ford, Fannie Mae, GE and many banks.  In addition, the value of these stocks declined significantly which concurrently reduced people's net worth.

One way to improve the chances of picking a good dividend paying stock is to refer to the Dividend Aristocrats list, which shows companies that have raised their dividends for 25 consecutive years.  Of course,  past results doesn't guarantee future performance.   There can be stocks on this list for which the dividend may be at risk, e.g Pitney Bowes,  currently paying a 11% dividend, which is makes diversification a good idea even with high safety stocks.

So far in May, I've added three of the stocks from the Dividend Aristocrats list to our trading account. At a 11% dividend, I may even consider adding a small position in Pitney Bowes, especially if it drops to $10.

Disclosure:  At time of publication, I do not own Pitney Bowes.

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This is not financial or investing advice. Please consult a professional advisor.

Copyright © 2012 Achievement Catalyst, LLC


S. B. said...

I am skeptical of the Dividend Aristocrats approach. In 2007, there were many names in the list such as GE, BAC, BBT, PFE, NUE, FITB, CMA, SLM, KEY, SVU, USB, and others, that all subsequently cut dividends badly over the next year or two. I would like to think I am smart enough to have avoided those names back in 2007, but I doubt it. These stocks were looking really good back then.

I don't have a reference to a formal study on this, but anecdotally there were a LOT of names on the list that subsequently cut dividends during the recession. I wonder if the dividend cuts on the aristocrats were not actually worse than the cuts on the general equity indexes.

Super Saver said...

Great point. I acknowledged the risk of a dividend cut in the post. Many of the stocks you mentioned were financial stocks, which were particularly hard hit and cut their dividends. Other industries, such as autos, also had dividend cuts. However, many other stocks, e.g. KMB, JNJ, CL, DD, VZ, T, XOM, continued to pay the same dividends. To me, diversification of industry will be one way to reduce the risk of a significant dividend cut.