It Pays To Be Bored With Monthly Dividends

I have written on this subject in the past but it bears repeating — and enhancing.

One of the things I seek when looking to invest in stocks, mutual funds or ETFs is: “Does the security pay a dividend?” When banks, or any other financial institution, loans money to an individual or to a business it expects to be paid back, in full, with interest; and the risks of loaning money to any given person or business is compensated through the level of interest payments (i.e. the more the risk, the higher the interest payment).

When we, as individual investors, purchase a company’s stock or bond we are, essentially, loaning that company money so that it can grow and run its business. As such, the same principals that apply when banks loan to individuals or businesses should also apply to individual investors. Our investments are, essentially, a business transaction that should be treated as such. They are not gifts or charitable contributions and we, the individual investors, should not be viewed by those running the companies in which we invest as anything less that a business partner or a willing creditor. Oftentimes, however, they don’t.

Sadly, I believe that the new modus operandi by which many American businesses currently operate is based on a philosophy of meism. Many companies today are run by people who are not good stewards. In many cases they are run by people who were raised during a time when do-overs ruled the day, and when there were no losers — only winners. It was a time when everyone received a trophy, regardless of their performance. But we, as investors, can not (and should not) be expected to assume the role of surrogate parents to a generation of people who were never expected to take responsibility for their actions. We (as their parents should have done) need to say “no.” We need to say no by not buying into their businesses.

All to often, however, (like that of a loving parent) investors buy into their carefully crafted stories by buying into their companies’ stocks, funds or ETFs — those that either pay little in the way of dividends, or ones that pay no dividends whatsoever. For all intents and purposes, we buy-in on faith alone. We invest with the belief, and with the assumptions, that the people running the companies know what they are doing and that they will, eventually, expand their businesses into vast empires that will, ultimately, make us all wealthy. And, though that type of investment philosophy can work at times and in certain situations, it only works so long as there are other investors (or surrogates :)) out there who think along the same lines and are willing to buy the given company’s stock at higher and higher prices.

Though there are times when a growth strategy pays off (think Apple or Google), generally speaking, the strategy does not work over the long-haul. Over the course of time there simply has not been that many “hot” growth stocks to hit the market. And those that have come to market have, for the most part, gone by the wayside in the due course of time (think the bursting of the Dot.com bubble). Stocks that rise in price (especially rapidly) during a fad or phase usually descend in price at some point (often more rapidly than they ascended) and, more often than not, before individual investors have a chance to get out without booking any losses.

Historically, dividend paying stocks have outperformed other investments over longer time horizons (click here for a nice rundown of the benefits offered by dividend paying companies), so why would anyone want to invest in non-dividend paying companies. Well, the answer is quite simple really — they don’t want to wait to get rich. In all too many cases, however, those who have attempted to “get rich quickly” have ultimately found themselves on the wrong side of the fence. Don’t look to join them in what is quickly becoming a very crowded neighborhood. I’m certain that people who invested in the “hottest” dot.com stocks during the mid to late 1990’s are now regretting becoming a member of that all exclusive club. (You know the ones:  “Oh God, please let this stock go up in price to a point where I can get out and break-even and I promise that I will never make another foolish investment decision.”)

For the initiated, I have compiled a list of monthly paying dividend securities. It is by no means a complete list, or one that should be viewed as any type of investment recommendation(s). There are certainly areas that need to be explored before making any type of investment decision. The list should be viewed only as a starting point for further research.

In my next post I will delve into some of the criteria that needs to be evaluated before any final investment decisions are made.