Is dividend investing a bad bet because it is so popular?
Everywhere you look these days there are articles and news columns written about dividend investing. Apparently simply looking at dividend stocks can transform anyone from a below-average investor to someone that beats the market overnight. Simply make sure that the stock has a history of raising its dividends, and then sit back and watch the money pour in. The modern argument goes something along the lines of: The dividend payouts of today’s blue-chip companies are higher than the return you’re going to get on 10-year bonds, so you’re crazy if you don’t
The Dragon’s brood
The other item that constantly pops up in these discussions is the fact that if a company has a healthy dividend, that means it is a “mature” company that has a proven business model. Kevin O’Leary of Dragon’s Den fame claims that his mom taught him this a long time ago. Given all of this hoopla over the indestructibility of dividend stocks I bet his mutual funds are performing great… err… even average? Nope.
Not a bad idea
Hey, I got nothing against dividend stocks. I think looking at dividends helps people keep investments for the long-term and avoid destructive behavior. Any time you can do that for an investor, that’s 80% or more of the battle right there IMHO. Because dividend stocks are usually blue-chip companies, you likely won’t lose your shirt very often, and even in down markets, you will have a nice stream of income to either enjoy or re-invest in order to maximize returns. I love the idea of dividend reinvestment plans, and compounding returns. In short, there are a lot of good things to point to if you want to be an authority on dividend investing, the only problem is that if this were a model that actually beat the market, it wouldn’t beat the market anymore.
Reverting to the mean
Investment companies have NASA mathematicians and MIT honors students to invent models for them to generate market-beating performance. They are also constantly on the lookout to steal any idea another person has and implement it themselves. You know what the end result of that high pressure world is? A stock market where no model (no matter how complicated) beats the market for very long. So, either dividend investing is the one magical model that always beats the markets and must basically fly under the radar of the NASA and MIT guys, or it is probably just a very good, pretty safe, way to invest your capital.
As someone who knows he isn’t as smart as the boys over at NASA, I’m a committed indexer for life. After reading Andrew Hallam’s book, and seeing a guy that bright and committed not being able to outdo the market with dividends or value-concentrated strategies, even when part of an investment group of really smart people I’m more convinced than ever. I think that the smartest people out there, the Warren Buffett’s and the really shrewd value-based investors (who are usually “contrarian investors” by definition since that’s almost always where the value is) are probably getting out of dividend stocks right now. A great general rule that I see repeated over and over again by the smartest people in the business is that if everyone in the media is recommending a strategy, then it is probably very profitable to do the opposite. Small caps anyone?