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Mon Nov 30, 2015, 10:36 AM

If you're looking for yield, it may be a good time to look at dividend paying stocks. (Edited)

Last edited Thu Dec 3, 2015, 08:29 AM - Edit history (3)

As most who pay attention know, CD's and other fixed income investments are at historically low yields these days. There are however, quite a few Large-Cap, S&P 500 stocks currently yielding over 3.5%.

While investing in individual stocks can be risky for the average or casual investor, sticking with the classic "Blue Chip" style companies has historically been a good investment, and right now their dividend yields are rather attractive.

A perfect example is Proctor and Gamble. Their dividend yield is currently 3.5% which is WAY above what one can get out of a 12 month CD, not to mention P&G has NEVER reduced their dividend. In fact, they have a long and respectable history of consistently RAISING their dividend and paying it regularly.

I can not emphasize enough that I do not and will not recommend a specific stock or investment on this group. Having said that, It must be said and should be of interest to the readers here, that "Chasing Yield" is a double edged sword.

Allow me to point you to an investment strategy invented by my former firm - AG Edwards. The program was and still is (Taken over by Wells Fargo Advisors, who, after Wachovia bought AGE, ended up owning the firm) used by the analysts and promoted to investors with admirable results.

DSIP which stands for "Diversified Stock Income Plan". The link is to a Wells Fargo Advisors .pdf and I want to emphasize that I am NOT, in ANY WAY, suggesting one do business with that firm. If it suits your needs and goals to do so, fair enough, but I am not shilling for my former employer here. I am merely attempting to point interested parties to a strategy that is not often discussed.

As you will read in the above linked article, the idea of the DSIP concept is to focus on companies that have a HISTORY of consistently RAISING their dividends, thus offering a portfolio with the potential for increasing returns over time that includes significant quarterly or biannual income.

Most of the guidance re: individual stock portfolios I received when I was with Edwards was that Brokers were encouraged to advise their clients to purchase an entire portfolio - 20 to 25 positions, BUT NO MORE (because more than that and you begin to form your own Mutual Fund, and that is difficult as all hell to properly manage), across the various sectors. This is not always practical for investors with smaller available balances, but it is advice worth heeding. It is all about mitigating risk as much as possible and diversification is one of the most effective ways of doing this.

Since the DSIP program is proprietary to Wells Fargo these days, finding an actual list of the current stocks is difficult on their website, but alas, a quick Google search revealed the following document from 2013;

http://www.themoellergroup.net/files/61402/RL-DSIP-Quarterly-Review-APR-2013.pdf

Scroll down to page 6 for the beginning of the list. It is important to remember that despite the best research possible, no matter who conducts it, there is no guarantee that a specific company will remain on the list. Many have come and gone over the years, as the key to inclusion is a history of RAISING dividends. If a company lowers their dividend, even for a single quarter, it is my understanding they are dropped from the list.

Once again, and I can NOT emphasize this enough, what I have written is NOT to be considered a recommendation to buy a specific security, nor is it an endorsement of Wells or a solicitation on behalf of the DSIP program. I merely want you readers to be aware that this research is available, that this program and investment style exists and has merit.

I can not encourage you enough to do your own research and make sure you FULLY understand the risks involved before making ANY investment.

May all your trades be net gains.


Edit;

I feel I should expand on the point I made in the 4th paragraph above where I said...
It must be said and should be of interest to the readers here, that "Chasing Yield" is a double edged sword.


The term "Chasing Yield" is one that I understand to encompass a modicum of risk that needs to be properly understood. One way to describe it would be in reference to bond yields. If a company issues a long bond that had at it's offering a high ("A" or better) rating and that company fell on hard times, the price of the company stock as well as their bonds tends to fall. When bond prices fall their yield rises, so simply searching for a 7% yield, as an example, when the going rate is 4% means that the bond has been bid into dangerously low territory and is considered by traders as being at risk for default.

The same must be considered when looking at high yielding dividend rates. The primary difference is that most bonds have a fixed "Coupon Rate" or payment till they mature whereas a stock does not have a fixed dividend rate/payment at all. A company is free to raise, lower or even eliminate a dividend at their will (Ford Motor Company is a perfect example of a firm that has done such things over the years), so if they come into financial difficulty and consider paying a dividend an extravagance, they can suspend one or more dividend payments.

To further clarify, consider that XYZ company trades for $10/share and they pay a $1.00 annual dividend. Their yield is then 10%. If XYZ is bid to $20 and they don't increase the dividend, the yield is now 5%. Conversely, if the stock falls to $5 per share, the yield is now 20% given that same one dollar dividend payment.

Looking for that higher dividend yield on stocks then requires one look at the financials a bit more thoroughly in order to have proper confidence the company can survive market headwinds and is therefore unlikely to reduce or suspend such payments.

That is the primary reason I suggest sticking with only the so-called "Blue Chips" for the purposes of the concept in this OP. Solid, established firms that make products you are familiar with and that get used regardless of the up and down cycles inherent in our economy.

I apologize for leaving such a gaping hole in my original description!

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Reply If you're looking for yield, it may be a good time to look at dividend paying stocks. (Edited) (Original post)
A HERETIC I AM Nov 2015 OP
flamin lib Nov 2015 #1
A HERETIC I AM Nov 2015 #2
SheilaT Dec 2015 #3
ret5hd Aug 2016 #4
A HERETIC I AM Aug 2016 #5

Response to A HERETIC I AM (Original post)

Mon Nov 30, 2015, 12:30 PM

1. My wife manages our portfolio and has adopted this

philosophy. She has moved all our investments to 'dividend aristocrats', stocks that have never reduced their dividends, and between stock value growth and dividend reinvestment our portfolio has grown by 8-10% a year.

When we retire we will simply cash out the dividends and combine them with Social Security leaving the principal alone.

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Response to flamin lib (Reply #1)

Mon Nov 30, 2015, 03:16 PM

2. Excellent.

I hope it continues to be an effective strategy for you.

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Response to A HERETIC I AM (Original post)

Thu Dec 3, 2015, 12:16 AM

3. As a sort of footnote to this, I recall reading

 

that during the Great Depression, when stock prices had fallen more than precipitously, any number of strong companies paid dividends. As their stock prices fell, the value of the dividends went up, but still not very many people could afford to buy stocks at the time.

This time is a bit different, but your strategy looking for dividends is a sound one.

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Response to A HERETIC I AM (Original post)

Sat Aug 27, 2016, 05:59 AM

4. Question about dividend calculations:

I'm not sure how to even ask the question.

Scenario: Say a stock has been at $10 for years (unrealistic, I know) and has payed a dividend of $1/yr for those years. Therefore, the dividend has been 10% for those years.

1) I buy this stock at $10 and then it miraculously goes to $100. Then later, I get a dividend of $1. Do I calculate my dividend as 10% or 1%?

2) Same setup as question #1, but I get a dividend of $2. Does this count as the company raising their dividend or lowering it? Would this company get dropped by a plan using the DSIP that you mentioned above?

TIA for answering my simplistic questions.

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Response to ret5hd (Reply #4)

Sat Aug 27, 2016, 03:00 PM

5. Just like with a bond, YOUR yield is determined by the price you pay.

1) I buy this stock at $10 and then it miraculously goes to $100. Then later, I get a dividend of $1. Do I calculate my dividend as 10% or 1%?


Since your original purchase price was ten bucks, your yield is still 10%. A purchaser at $100 however now has a yield of 1%. It matters only to the purchaser at the higher price that the yield has fallen. You invested $10/share and are getting $1.00 a year. That's ten percent anyway you want to look at it.

2) Same setup as question #1, but I get a dividend of $2. Does this count as the company raising their dividend or lowering it? Would this company get dropped by a plan using the DSIP that you mentioned above?


If the company raised their dividend amount, it would certainly be considered as an increase, but if I recall correctly, it would have likely been dropped from the list because the current yield dropped from 10% to 2% - ie; a $1 dividend on a ten dollar stock vs. a $2 dividend on a $100 stock. The DSIP program was set up to attract new investors, as well as chase the idea of a portfolio of stocks that had a history of raising dividends, and therefore overall yield.

I seems to me that the serious growth stocks tend to NOT pay dividends - there are always exceptions (!) - Facebook is a good example, but that is certainly still a new company - not a Proctor & Gamble or General Electric by any means, and they may of course start to pay dividends at any time. Remember that FB went from it's initial IPO price in the $30 range, down to around $18 and now trades at $124, yet they have not payed a dividend so far.

Neither scenario you suggest however is completely unrealistic. If you look at the history of Ford Motor Company share prices as an example, it has moved in a relatively narrow range, and for years they paid dividends sporadically, as opposed to quarterly. At the very bottom of the market back in late 08/early 09, Ford traded for a short time as low as $1.01, then steadily rose to almost $17 a year and a half later before settling back into their historical range, closing yesterday at $12.38 (back in the late 90's, Ford spiked up to over $30/share but it didn't last long).

Hope that answered your question.

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