Many investors have adopted the Dividend Growth Investing (“DGI”) style, especially since the Global Financial Crisis (“GFC”) that shaken many old-previous beliefs.
Thing is, when you are mostly (let alone entirely) focused on the dividend, you sometimes miss out on bigger trends. Things that are happening on the macro level (affecting the entire business case) stage and can’t/don’t be seen on the micro level (the dividend keeps getting increased so everything is, allegedly, cool).
Two and a half years ago, I’ve published an article titled “The Stunning Story Of Retail eREITs And Why Total Return Matters Even For Dividend Growth Investors“, that concludes with the following statement:
Even DGIs should bear in mind that dividend growth investing is not about “Dividend Safety vs. Total Return” rather “Dividend Safety & Total Return”. The former must be escorted by the latter!
Almost 21 months later, on July 22, 2019, I’ve published the second part, ending with the following statement:
Even if your journey starts with the dividend, it mustn’t end there!
Knowing my crowd, I trust that there will be at least one reader who will post (or at least think) something along the lines of “Well, of course. Now, with the virus, it’s very easy to acknowledge that”.
My reply (if such a comment will be waiting for me) is:
1) As you can see, I’ve said that way before anyone ever thought that corona would be something way bigger than just the name of a popular beer.
2) Let me explain why my old statements have nothing to do with the virus. They were valid long before, for anyone who isn’t only looking at the dividend.
Take two, very popular, names like Simon Property Group Inc. (NYSE:SPG) and Exxon Mobil Corp. (NYSE:XOM). Many people love and hold these stocks because they’ve delivered the goods (surely a dividend) for so many years.
Thing is, with zero analysis whatsoever, anyone who hasn’t closed his/her eyes to the below chart could have (at least) understood that something is wrong. The below chart is only showing two simple lines for each stock: Growth of the (quarterly) dividend vs. growth of the stock price.
As long as the two are rising together (not necessarily at the same pace) – there’s a reason to keep looking under the hood (always!), but there’s no reason to be worried. However, when the two lines start diverging significantly, you must (at the very minimum) become more suspicious.
When the two lines diverge – 2014 for XOM, 2016 for SPG (i.e. way before Covid-19) – you must become less blinded by the (alleged) dividend safety. The divergence that you see here means that anyone who is mostly/solely focusing on the dividend growth/safety is very likely to miss what’s going under the hood.
You keep seeing a nice view (dividend safety/growth) from the window, but you become completely unaware of the engine (business model), slowly but surely, cracking (possibly breaking down)
Here’s my thought:
When you put too much emphasis on the dividend – you’re more likely to miss the forest (total return) for the trees (income).
When you put too much emphasis on the dividend – you’re more likely to the point where you must separate the wheat (business) from the chaff (dividend).
Don’t let the dividend safety blind you!!!
(As a side note, I wish to add that you shouldn’t let a dividend cut blind you either. Some of the best opportunities may be found following a cut…
I know that some authors around here like to say that “the best dividend is the one that just been raised”, but sometimes, real gems, it’s the other way around…)
What’s yours?
Disclosure: I am/we are long SPG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: TipRanks: BUY SPG, HOLD XOM
Be the first to comment