Market Place Blinders

January 5, 2015

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My bride and I are basically retired and living off a combination of income streams. We both have small pensions and collect social security. Since we have no major debts, we could probably make do on that.

However, we both saved in company sponsored 401K programs while we were working and did some other investing as well. The dividends of those savings are adding to our retirement income and providing the money we need to continue to live more comfortably. We can buy gifts for our children and grandchildren and we can travel. We’re far from living in the lap of luxury, but we have enough. (More people should learn to be happy with ‘enough’!)

Our investment plan has been fairly simple. We bought stocks, bonds, and mutual funds that all pay quarterly dividends. Until we fully retired, we let the money grow through dividend re-investment programs. From a psychological standpoint, it made following the market rather interesting. It’s always comforting to see the value of your investments going up. But, come quarterly dividend time, it’s fun to see the value go down – that means your re-investment will result in a greater number of new shares. Thus, your next dividend payment will be that much larger!

We continued to let things grow until we no longer had regular paychecks. Then we quit the re-investment programs and now have the dividends automatically deposited in our bank account. So far, it is working great! And that bothered me.

It bothered me because none of the experts I follow, nor the publications I read, recommend doing such a thing. In fact, while they are saying that bonds are not a good investment at this time, people our age should be moving more of our assets into bonds. Go figure! They have all sorts of fancy formulas, but none of them make sense. Why should I put 50 to 60% of our retirement nest egg into something that the experts are saying to avoid?

I read an article this morning in Money Magazine. It was talking about the problems of going after high-yield (translate that into dividend paying) stocks. Their take was that as the price of the stock went up, the yield (translate that as the amount of the dividend payment as a percentage of the price of the stock) went down – unless the company increased the amount of the dividend.

For example, let’s say you buy 100 shares of Jim’s Journeys for $100 per share and I pay you $5.00 per share per year in dividends. The yield is 5%. Now, if everyone wants a piece of the action and the price of my stock doubles to $200 per share and I continue to pay the measly $5.00 dividend, the yield is now a mere 2.5%. On the other hand, if the market dives (through no fault of my blog) and my share price dips to $50 per share, your yield is now a whopping 10%.

Thus, looking through the “Market Place Blinders” unless you buy the shares at $50, it may not be a good deal. But the financial planners and experts fail to see it any other way. They only see values at the time of the transaction. If you are not currently buying or selling, they are not paying much attention. Yields, to them, are nothing more than the percentage of the selling price.

In truth, I can’t tell you how much we paid for individual shares along the way. I really don’t care. The only thing that concerns me is the size of the quarterly checks.

So, if I was your financial adviser, I’d tell you to do what I did. Spend a month examining every company that pays dividends. The questions I asked were: How much do they pay per share? Has that amount increased over the years? What sort of business are they in? (I avoided any company that did not manufacture something. Mortgage companies, banks, and holding companies all pay handsome dividends, but they’re the companies that had to be bailed out and were saved only because they were “too big to fail”.)

As to our dividend income payments, my only regret is not taking advantage of this methodology sooner in my life. I watched our nest egg grow for about ten years before we began to reap the benefits. Had I begun the process much earlier, the nest egg would have grown more substantial and we would now be living in the lap of luxury. But then again, we’re more than happy with enough.

Hopefully the time it took me to write this article will pay dividends for the person who takes the time to read it.

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