Dividends

I love stocks that pay dividends.  I was all set to write a column about why, when I read someone else's.  Click below to read another author's expansion upon the following points.  The comments here are mine.

Companies that pay dividends usually have more money than they know what to do with.  This is one of those statements that should be true, and as you look into dividend-paying stocks, try to make sure that it is.

Companies that pay dividends are often here to stay.  Again, this should be true, and usually is true, but might not be.  I like to look at the price-graphs for a stock I'm considering and see how long the stock has existed and how long it's been paying dividends.  There are some stocks out there that kick out fat dividends to encourage investors and drive the stock price up, even if that company can't keep those dividends going over time.  I invested about $500 in WWE (yes, World Wrestling.  I'm not ashamed.) because it consistently paid a dividend with an annual yield of over 12%.  It had paid its portion of that annual yield each quarter without fail for 3 years before I bought it.  I had paid no mind to various blog-posts I had read wherein the writers claimed that there was  no way that the company could keep paying out that much money each quarter.  They were right, though, and the dividend was reduced by 2/3 almost immediately after my purchase, and the stock price dropped about 25% as a result.  That said, the stock is here to stay, so maybe the truism in question is true after all.

Companies that pay dividends may even outperform while exhibiting an investor to a much lower risk profile -- especially if reinvested dividends are considered.  Yes, yes, yes and yes.  Typically, dividend-paying companies take fewer risks with money than companies that don't.  Also, in volatile times the price of the stock is influenced by the dividend yield.  On a bad day when all stocks are dropping in price, buyers will grab up dividend-paying stocks, keeping the price up, or at least keeping it from falling too far.  Also, if a stock pays a decent dividend and those dividends are reinvested then it's okay if the stock price doesn't rise.  It's even okay if it falls for a while.  That just means that the dividends will buy the investor more shares than they would have if the price was static.  Buy, hold, and reinvest until the price goes up.

I mentioned last week that my TICC stock was and is a dividend play.  In September I bought 200 shares at $8 each.  In the quarter since I bought it, the stock increased in price to nearly $9 before it paid a dividend of $0.25 per share.  200 x $0.25 = $50.00.  That $50 was reinvested and now I have 205.568 shares of TICC.  If the price had stayed at $8 then I'd have 206.25 shares.

Next quarter, instead of 200 shares paying $50 in dividends, I'll have 205.568 shares that should pay $51.39.  Sweet!

Oh, and the price per share has gone up to $9.44 as of this writing.  The upshot is that my total investment of $1,600.00 is now worth $1,940.56.  Not bad for an investment of less than 4 months.

Half of the rest of my stocks pay dividends.  ABB pays a little.  BABB pays a lot.  Both of them pay their dividends quarterly, which limits their volatility.  MNDO, on the other hand, pays its surprisingly hefty dividend annually, which means that during a great deal of the year the price is low, and then it goes up around the time that the dividend is paid.  This changes my strategy a bit for this stock, and it brings up the subject of timing.  We'll talk about timing next week.