Question about dividend stocks - Curious

[Mulligan]

Quote:

Originally Posted by eta2020 And what is dividend that lets say for 40 years grows faster then inflation every single year of those 40 years?

Then that is a good dividend! But that is money on top of money though. That means the underlining company I assume is doing quite well. Now would they be doing even better if they reinvested it? Who knows, depends on how they put the capital to use. But I am an extreme dividend lover hence being in preferred stocks for income.
Now if things go bad protecting a dividend COULD be a bad thing I suppose. They were talking recently about Chevron doing asset sells and such to provide cash to ensure dividend if oil stays down for a considerable time. That scenario would not excite me as a longterm shareholder to sell off parts of the company just to give me cash.


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[NW-Bound]

Quote:

Originally Posted by Mulligan ... They were talking recently about Chevron doing asset sells and such to provide cash to ensure dividend if oil stays down for a considerable time...

When profits are hard to come by, either the investor has to sell some shares or the company will do it for them via asset sales. But in the case of Chevron, most oil asset prices would be depressed, plus who has money to buy? Oh boy, talk about selling low...

[Mulligan]

Quote:

Originally Posted by NW-Bound When profits are hard to come by, either the investor has to sell some shares or the company will do it for them via asset sales. But in the case of Chevron, most oil asset prices would be depressed, plus who has money to buy? Oh boy, talk about selling low...

Or even worse those shipping stocks I learned a lesson from. They have dividends galore ....7-12% .... But debt like a "Spenderina" with no job. The minute things go south, the dividend is gone too. At least those Big Oils have good credit and paid off assets to sell if ever needed.
That is always a criticism of share buybacks. They tend to do it when things are going real well and thus so is the stock price for which they are paying.
When things go bad they don't have the cash to buy the shares back when they are low.


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[modhatter]

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Originally Posted by Mulligan 100% agree with you, NW. Basically a dividend is, "you can be more effective with the excess cash than we can". But, as we all know, the price of its stock isnt always its intrinsic value, but ultimately just what one is willing to pay for it. A dividend can mentally help one ride out the storm when stock buyers are not willing to pay as much for earnings (or losses depending on the company). That is what helps me (mental part). If my preferreds do nothing price wise, I gladly take the 6-7% of safe divis and move on. If they would ever tank 20% no sweat, I got my money back in 3 years. Since I am reinvesting all dividends, in effect, this would actually increase my yearly income. In no way am I suggesting this strategy will beat a pure common stock market investing strategy. In fact odds are it wont. But investing for income has its pluses and its minuses. Sent from my iPad using Tapatalk

Mulligan, how long have you owned preferreds? Did you own them back in 2008? If so, did you experience many that suspended dividends during the the rough times? Isn't PFF primarily financials? I know I had some individual preferreds that if I recall right did suspend dividends for a while. I don't know how they played out across the board in a larger etf.

[Mulligan]

I am more recent into them Modhatter in the past year. Moorebonds pointed me in that direction and then I dug deeper to suit my specific needs. I am basically almost all in electric utility preferreds. After checking the historical price movement of them, that is what fit my more conservative "chase for yield". Take CNLPL a preferred I own. A 1968 issued 6.48% $50 par stock. If you look at the 20 year stock chart of it, you see very little historical movement. It "collapsed" all the way down to about $45 during the depth of the 08-09 crisis. Unlike the REIT and bank preferreds which many went to $8-$9 dollars ($25 par). Of course that recession was a bank fueled crisis. Looking back with the benefit of time, a person would have made a killing as none of the BoA, JPM, or Wells issues never stopped paying. Utility preferreds have historically been very safe. Especially the transmission and distribution only monopoly ones. I have yet to find a historical example where they have never not paid. Some of the preferreds issued by utilities I own have paid 60-75 years without missing a payment on a particular issue. As NW has said, there is no free lunch though. My risk is unforeseen high inflation, illiquidity, and a call of the issue. But... 1)Illiquidity doesn't matter to me as I am not selling and it keeps the idiots out who are traders. Grannys and orphans who have stuffed these in the vault 30 years ago aren't traders.2) A call isn't a monetary risk to me as worst case, I just get my money back. I would rather risk a call on a 6.5% preferred than get caught with a 5% one that is not callable. 3) Inflation? Well one has to take their chances somewhere. I am betting a safe 6.25% - 7% yield wont be met in the CD market for many years to come. Historically speaking these "yield trapped utes" were issues 100-200 basis points above 10 year treasury. Now they are 400 basis points above. Good value in my mind....


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[NW-Bound]

I have not owned any preferred. Thought about it a few times, made a mental note to check it out, then forgot it.

Come to think of it, the preferred yields from utilities seem to pay you enough relative to long bonds to compensate for the risks. I might be more comfortable with preferreds than with long bonds to park some of the portion I reserved for fixed income, for diversification purposes.

I need to think some more about this.

[eta2020]

Quote:

Originally Posted by Mulligan Take CNLPL a preferred I own. A 1968 issued 6.48% $50 par stock. If you look at the 20 year stock chart of it, you see very little historical movement. It "collapsed" all the way down to about $45 during the depth of the 08-09 crisis. Unlike the REIT and bank preferreds which many went to $8-$9 dollars ($25 par). Sent from my iPad using Tapatalk

I do not know if this is a rule for Preferred.
I look at charts of PFF from April 2007 and compare them to BND and S&P 500
and I see PFF nose dive, BND stay flat and S&P also nose dived.

S&P is by now way up from 2007 prices while PFF is still way lower (25%). Of course during the years PFF payed hefty yield.

PFF nose dived perhaps even more aggressively than S&P 500.

[NW-Bound]

PFF has lots of finance companies. As culprits in the mortgage meltdown, they deserved to be punished. But as Mulligan pointed out, they recovered too, thanks to TARP.

[eta2020]

Into that chart starting in April 2007......

And funny is if I plug good old boring stock that always raises dividend by 7-10% that is Coca Cola it beats PFF, S&P, VIG, BND and CNLPL and it it raised dividend in 2008 and 2009.

With good quality all you need is time and patience.

[Mulligan]

Quote:

Originally Posted by NW-Bound I have not owned any preferred. Thought about it a few times, made a mental note to check it out, then forgot it. Come to think of it, the preferred yields seem to pay you enough relative to long bonds to compensate for the risks. I might be more comfortable with preferreds than with long bonds to park some of the portion I reserved for fixed income, for diversification purposes. I need to think some more about this.

It is very obvious nobody on Wall St. pays any attention to them. A group of traders were talking about 7% yield as crazy reach for income for bonds. Well yes it is on junk bonds. But you can almost get that in relative safety with certain preferreds. Many of these companies that have left their 6% preferreds outstanding are borrowing money with bonds for 3-4% for 20-30 years.
I have heard one trader in a year on CNBC mention preferreds, and all the talking head could respond to was "oh the things Warren Buffet buys". They know nothing about them. Why buy a junk rated bond for 7% plus when you can buy the preferreds of an investment graded company for 6% plus.
It is like one person I read who is very knowledgable on preferreds said. "Its like being at the end of the lunch line and getting fed plus all the leftovers too. As long as their is enough food for everyone, I will wait at the end of the line and get fed more".
Take Wells Fargo. They have over 5 Billion shares outstanding and pay each share $1.52 a year and that is only a 36% payout ratio. ALL OF THAT has to be wiped out before they can consider suspending their WFC-L preferred which yields around 6.4%. That is WAY safer to me and better value than a senior debt note of some crap company yielding 7% or more.
This isn't the path to excessive riches but if you are interested in part of your money being income stream orientated it is worth studying at least.


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[eta2020]

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Originally Posted by NW-Bound PFF has lots of finance companies. As culprits in the mortgage meltdown, they deserved to be punished. But as Mulligan pointed out, they recovered too, thanks to TARP.

Yea they recovered by being -22% today from April 2007

[Mulligan]

Quote:

Originally Posted by eta2020 Yea they recovered by being -22% today from April 2007

That is why I am not a big PFF fan or a bank preferred fan (other than WFC in modest doses). Somebody made a killing on these thanks to TARP. Many such as the Merrill Lynch preferreds are still outstanding and paying. They were issued at 7% 25 par and went below $10. That means they are still getting 20% a year dividend plus the capital appreciation that has taken them back above par today. Im not willing to bet all my money on another TARP bailout, so I got less than 10% of my money in bank preferreds, and I certainly am not investing in PFF that is what about 70-80% financials?


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[eta2020]

I will bring up one more point.
Not only KO would beat S&P, PFF, VIG, BND and CNLPL from April 2007 till now.

It would do one more very nice thing. It would pay you north of 5.5% yield on your money that you invested in 2007.

So today you would be collecting 5.5% plus yield

That is why dividends matter

[Mulligan]

Quote:

Originally Posted by eta2020 Yea they recovered by being -22% today from April 2007

You need to remember Eta, that if you bought some of these you would be receiving 20% a year dividend every year. That means your money doubles every 3.5 years.... So it is not down 22% today. It has swamped the market in returns the past 8 years.....BUT....that is irrelevant for today and todays purchases. Comparing preferred to common stock is not a correct comparison. If you have no interest in investing for income stream, you would have no interest in preferreds. And that is not either a good or bad thing in my mind.


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[JPatrick]

At the moment VYM is my fav dividend holding, in fact I'm adding on the big swoons. I also have an old DVY holding, but because it has lots of utility stocks, I'd wait until the future of interest rates is clearer.
Also have a larger holding of EPD, but here you get into K1 issues, which is not really a problem, but a bit of a hassle.
If you go into mutual funds, be careful as we get close to year end. This latest tumble has resulted in huge redemptions which for many funds will mean very big cap gains coming up. You just don't want to be buying close to the cap gain record date. If you do you'll pay some taxes you could have avoided.
But, all in all, right now is a great time to buy..YMMV.

[Mulligan]

Quote:

Originally Posted by eta2020 I will bring up one more point. Not only KO would beat S&P, PFF, VIG, BND and CNLPL from April 2007 till now. It would do one more very nice thing. It would pay you north of 5.5% yield on your money that you invested in 2007. So today you would be collecting 5.5% plus yield That is why dividends matter

In comparing a preferred stock to ITS common stock, it generally takes 10-15 years for a good company's common stock to catch up to its preferreds yield. Now if the yield of the preferred is reinvested it may take 30 years....BUT that is not considering capital appreciation of the common that may or may not occur.
Comparing common stock to a preferred stock is not a valid comparison. If someone ditched all their common stock to buy preferred stock probably needs to sit down and think what their investment strategy really is and what they are really investing for.


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[eta2020]

Quote:

Originally Posted by Mulligan In comparing a preferred stock to ITS common stock, it generally takes 10-15 years for a good company's common stock to catch up to its preferreds yield. Now if the yield of the preferred is reinvested it may take 30 years....BUT that is not considering capital appreciation of the common that may or may not occur. Comparing common stock to a preferred stock is not a valid comparison. If someone ditched all their common stock to buy preferred stock probably needs to sit down and think what their investment strategy really is and what they are really investing for. Sent from my iPad using Tapatalk

I agree.

I am just trying to show that quality matters and dividend matters. But you need time as you pointed out.

I am not sure about 30 years. AT 8% dividend growth you need 72/8 = 9 years to double your yield. I think 8% dividend growth is not unusual for many good boring companies like P&G, JNJ, KO PEP, CL...

Once you double them you are looking at 5-6% yield on your investment...not far from preferred stocks.

[Mulligan]

Quote:

Originally Posted by eta2020 I agree. I am just trying to show that quality matters and dividend matters. But you need time as you pointed out. I am not sure about 30 years. AT 8% dividend growth you need 72/8 = 9 years to double your yield.

I think we are way closer to agreement than maybe what we are saying. The 30 years is a very fluid number. It depends on which company we are discussing. And remember I am referencing a common dividend stock of the SAME company, not mixing an ATT yeild with another companies preferred. Take Wells Fargo....Its common divi yields 2.80% while WFC-L yields 6.37%. Assume a 3% yearly increase and it is going to take a helluva long time to get to that effective yield price. Thus this is why its considered "investing for yield". At todays prices one would have to be a fool to count on a penny of capital appreciation from the preferred. It is solely a commitment to investing for income.
And that may not be what many people need. My Dad switched to preferreds last year on most of his money. He is almost 80. Once he said, "I dont care what the stock price does I want my 6-7% dividend income. I don't care if the stock goes to a penny as long as I get my 6%". I knew then he was a candidate for these issues and helped him buy.


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[Senator]

Quote:

Originally Posted by eta2020 I will bring up one more point. Not only KO would beat S&P, PFF, VIG, BND and CNLPL from April 2007 till now. It would do one more very nice thing. It would pay you north of 5.5% yield on your money that you invested in 2007. So today you would be collecting 5.5% plus yield That is why dividends matter

The 5-year chart shows the S&P smoking KO. 88% vs. 40% gains. Since 2007 or longer, KO wins.

I am not saying KO is a bad stock, it's just hard to beat the S&P over time.

[NW-Bound]

Quote:

Originally Posted by eta2020 Yea they recovered by being -22% today from April 2007

But without TARP, many of them would be dead meat. Well, except for Wells Fargo and perhaps a few more I do not know about. Buffett knew about these guys' shenanigan back then. He bought Wells Fargo, if I remember right, but not others.

Anyway, if I am to get preferreds, I would get utilities, but not financial guys. I still hate the latter for the trouble they caused.