No Research Reasons Why I Like Mature Dividend Paying Stocks

Between providing alternatives to the dividend aristocrats, discussing preferred shares and building a pension I feel like I have been talking about investment income a bit too much lately and I am going to slow down for November…right after this post.  The other day a pretty regular commenter, John from Curious Cat Investing Blog, said that for “some reason” he is often drawn to dividend paying stocks and it got me thinking why am I currently obsessed with them?

Be forewarned despite my usual aversion to words like “I feel” “I believe” and “I think” I use them a lot in this post since it is just discussing how I feel (terrible pun intended).

Zero Research Reasons Why I Like Regularly Paying Dividend Stocks

Originally, I was going to research returns of dividend paying stocks but I ultimately decided against it (although I am POSITIVE I will write about it in the months to come).  While I fully admit it is a terrible idea to invest with your gut I believe these reasons are more theoretical then simply what is on the balance sheet.

Companies That Have Regularly Paid a Dividend Want to Continue To Pay A Dividend

When most people are asked to invest a certain amount each month, month in and month out I think there is a greater chance for them to falter then when that same person is asked to pay a bill every month.  Why? Because missing a bill has negative repercussions.  When this analogy is applied to stocks a company that has been paying a dividend for 18, 22 or 47 years it doesn’t want to miss a dividend payment or a dividend increase because of the negative ramifications associated with the change in direction.

Does this mean they always continue? Of course not.  Stocks are dropped every year from the Dividend Aristocrat Index and Dividend Champion List for failing to increase their dividend.  Notwithstanding when an organization has been increasing dividends for a quarter of a century or more it is engrained in the mindset of the higher ups.

Dividend Payments Will be accounted as if they were a bill not to be missed.

It is Mentally Easier to Live off a Stream of Income than it is to Sell Principal

I am only 30, however, I work in the financial services industry so I interact with those moving to the “spend down” or decumulation phase weekly.  It is the point in life when you are done saving/investing and now you just have to live off what is coming out of the bucket you created.  But what if that bucket has no income? What must be done? You have to start selling equities.  Granted, someone who is 67 with a bucket that throws off zero income either has a different stream of income (a business or rental property) or they/their financial planner have no clue what they are doing?

Lets take a step further back though what if you aren’t 67, but rather are 42, or 48 and just want an additional stream of income? Do you start eating into principal? I know I wouldn’t want to, and this is one of the reasons I am growing my income portfolio today.  It is so that in 12, 17 or 24 years I can just turn off auto reinvests and start partially living off the passive income.

I Bought A Business

While most people don’t talk about it in this manner anymore, but when you buy a share of a company you are buying into the business. If I am to buy into any business I want to know revenue, profit, and how I am going to share in those amounts.

Imagine if you bought a piece of commercial real estate and they (not sure who they are) just said you won’t share in any of the rents but on the upswing we’ll give you part of the sale.  Not a terrible deal, but who is to say they’ll ever sell or merge, where is your payday going to be? While obviously simplistic but what good is buying into a business that doesn’t share with you the fruits of their labor? Which leads me to the final reason.  

The Greater Fool Theory and Dividend Investing

This topic could have its own post, but according to Investopedia the Greater Fool Theory,

What Does Greater Fool Theory Mean?
A theory that states it is possible to make money by buying securities, whether overvalued or not, and later selling them at a profit because there will always be someone (a bigger or greater fool) who is willing to pay the higher price.

Investopedia explains Greater Fool Theory

When acting in accordance with the greater fool theory, an investor buys questionable securities without any regard to their quality, but with the hope of quickly selling them off to another investor (the greater fool), who might also be hoping to flip them quickly. Unfortunately, speculative bubbles always burst eventually, leading to a rapid depreciation in share price due to the selloff.

So if I am not sharing in the profits of the company aren’t I just buying into a stock with the hope that someone will come along and want to pay me more for it?  

I don’t even think pure Buffett fans can argue this point since so many of BRK’s holdings are consistent dividend payers (I had to throw a little research into the mix lest my google skills get rusty).   However, I am happy to contradict myself as my Dividend Investment Portfolio searches out those dividend aristocrats which may be undervalued.

I struggle with the theory and its application since I don’t entirely subscribe to it, but there is something innately true about it.

 

A thousand words about my “feelings” and “beliefs” is about all I can take! What do you say? Do you believe in any of these without research? or do you need hard research? Do you have any papers you like?

11 Responses to No Research Reasons Why I Like Mature Dividend Paying Stocks

  1. I like your justifications, and the thought of owning a small piece of a massive and successful corporation is pretty cool. It still pays to keep an eye on these investments as nothing stays the same for very long.

  2. There is a lot to buying a business and knowing that you will be sharing in the profits. That is what has made Buffett so successful. I want to be living off a stream of dividends someday.

  3. I definitely don’t want to eat my principle when I retire @ 40. That’s a good way to run out of money before you die. I don’t mind dipping into the dividend stream a bit though.

  4. Surprising that as much as Buffett believes in dividend stocks, BRK has never paid a dividend.

    I like dividend payers but if the company can reinvest that money better than I can, they should do so.

    • “I like dividend payers but if the company can reinvest that money better than I can, they should do so.”

      Maybe…not sure if I am cool with that. Why can’t it be both?

  5. I think a lot of what you say holds true. Dividend Aristocrats in particular have proven their commitment to continue paying dividends so they can be expected to continue doing so for the foreseeable future. And the fact that dividend stocks can generate income without having to sell them off is a big plus for me.

    • “And the fact that dividend stocks can generate income without having to sell them off is a big plus for me.”

      I think that is the most exciting thing for me too!

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