Nowizard wrote: ↑Thu Nov 12, 2020 8:50 am
Is there not an argument to be made that numerous stocks with high dividends also do well with total return? Our dabbling in the past with stocks such as ATT, Verizon, MO have strongly suggested that as an outcome.
Tim
You are picking some positive outliers there. Many other companies whose stocks paid high dividends far above a standard deviation of the market's mean interest rate have ended up cutting them. When this happens, the dividend investors sell and the price plummets. GE and KMI leap to mind. And AT&T's total return is terrible if you bought it recently. Interest rates above 4% in a stock (vs REIT) should be viewed with great skepticism. A much higher than market dividend usually goes with a price that has dropped significantly--raising the dividend yield while, of course, the actual dividend stayed the same. MO, for example, is a company that a lot of institutions won't invest in given that its product addicts and kills people, and that the marketing strategy is to addict teens in the third world to ensure a supply of future customers.
You have to dive deep into the financials of a company paying a very high dividend to know if its earnings and cash flow support its dividend going forward. There are a bunch of companies out there who have taken on large amounts of debt to finance their dividends. Even when debt is cheap it still has to be repaid.
I like the underlying idea of investing in sound dividend paying stocks, but I don't buy them in a big basket of stuff I don't know anything about (i.e. a fund or ETF.) I do buy individual dividend stocks, but as part of a 15 stock portfolio, bought to be held for 5 years. I investigate the financials and business history of each company and have been careful to select very high quality ones that I think will flourish through the next few years which I see as being ones of recession. I scaled into this portfolio, just a little every month, since last spring and so far I am quite content with my results. Since my goal has been to equal the 3% I was getting in my CDs previously I do not have to be greedy. I look for large, very well known companies whose current P/E is not significantly more than their average P/E over the past 5 years, whose earnings per share have a consistent history of steady growth, and that have a long history of paying dividends. I am not obsessed with dividend growth because sometimes there are good reasons for a company to freeze its dividend and use the money to keep the business successful.
My investment in individual stocks makes up only a bit more than 2% of my assets and replace one CD that came due this year. I will invest more if I see something that appeals to me, which right now, I don't as people hungry for yield have bid up everything with an appealing yield to where it no longer IS appealing. What is left with nice yields are companies with "issues."
That said, I have been involved in studying the minutiae of business since the 1980s, I enjoy accounting, and have been stuck in my house unable to go anywhere or see anyone for many, months, which gives me lots of time to fill. I find investing an interesting hobby that passes the time until I can go back out into the world, play my guitar, and visit my new grandchild who lives far away.
I would not suggest that people who have not spent considerable time studying stocks invest in individual stocks or risky bonds as they are much to likely to make mistakes. So unless you are dedicated hobbyist who loves reading every gritty detail about what is going on with companies, you should stay away from any kind of sector fund, both stock and bond, and as the committed Bogleheads preach, invest only in the broadest market funds.
. I am also planning on living off dividends.
