I sometimes find it hard to believe individuals will invest in stocks that don’t pay them any money on a quarterly basis. These individuals are giving up their hard earned capital, in exchange for risk and the chance of capital gains. Dividends tend to provide certainty, security and is your compensation for bearing part of the companies risk/reward.
Please note there are many factors that go into investing in dividend paying stocks. It is important to not just look at the dividend yield. Many factors should be looked at such as earnings growth and dividend payout ratio. I have seen numerous circumstances where companies that have high dividends end up getting burnt badly (Kraft) because they missed a certain figures in earnings. As with any investment, all factors should be assessed carefully before investing in a dividend paying stock.
A comparison that I heard a while back was that of owning a 1000 barrels of oil versus owning the pipeline that delivers the oil. What would you rather own the pipeline or the 1000 barrels of oil?
In 2019 1,000 barrels of oil would be equivalent to $63,900, and I wouldn’t blame most individuals for taking this route. The thing is, the pipeline will bring a perpetual benefit as long as oil is still around (controversial). The point is, that you won’t have as much immediate cash owning this pipeline, but the oil the companies that want to utilize it will have to pay a fee to move it through consistently over the next several decades.
Let’s say this pipelines upfront cost was $1M. In 2019 moving 1,000 barrels of oil 1,000 miles via pipeline would cost approximately $750(much cheaper alternative than rail, air or truck). Nevertheless, just transporting this much oil everyday for a year would yield $273,750. While most individuals would focus on only receiving that $750 rather than the $63,900, standing back and being patient it is clear owning the pipeline is much more profitable and will be paid off in around 4 years.
When thinking of dividends I think of this pipeline analogy. I want something that will pay me concurrently forever. I want to think of every stock that I own as the pipeline and the dividends that I receive from the company as the oil that flows through this pipeline. Putting up hard earned capital for an investment isn’t easy and I believe that I should be compensated according to the risk I put up. Owning a pipeline and not receiving any oil royalties would be a horrible investment. I believe the same thing goes for owning stocks that don’t pay a dividend.
Nothing stated in this article is a recommendation from Forehand Financial to buy or sell a particular security or asset class. You should wisely consider your tolerance for risk, time horizon, and financial goals before making an investment. With investing, you run the risk of losing money, always read an investment prospectus and make an informed decision before allocating capital to a particular investment.