Monday, March 30, 2015

Stock Talk - 7

A long time ago, I was mentored by a wonderful man at General Radio. Like most of the executives at GR, he had a engineering degree from MIT, and he was a very literary, very well read gentleman. He was active in the stock market, and I listened carefully to the pearls of wisdom he would cast. He had two portfolios, one designed to generate dividends, one designed to generate capital gains. And he noticed a curious thing: The dividend portfolio regularly outperformed the trading portfolio, even without considering the dividends! Of course, that may have been a sign of the times (the fifties), but dividend-paying companies tend to be stronger financially, and these are times that try one's balance sheets.

These days I have two portfolios, one designed for trading, one designed for current yield, and they exhibit the same results that my mentor found in the fifties. Of course that may be because I'm a lousy trader, but I think there's something more basic going on.

Lately, oil stocks have been plummeting, and that hurts returns from these stocks, which are heavy dividend payers. But there's an offset: Utilities tend to use lots of oil, and these stocks, also heavy dividend payers, benefit. Besides, the year is early, and it's too soon to declare dividend-payers a loser.

Focusing on dividend-paying stocks needn't mean giving up excitement. Even Apple pays a dividend. It's only 1.5 percent, but that's a lot more than you'll get on a CD from your local bank, and Apple is, to put it mildly, solvent. And Apple may well raise the dividend in the future.

So my thought for the day is this: Favor dividend payers. Check the dividend, and then look at the consensus estimate for earnings in the coming year. The lower the dividend as a percentage of the consensus, the better.