Dividends

For traders who play swing trades and/or position trades (short term to slightly longer term, usually no more than 6 months) selecting a stock because they pay dividends is pointless and a waist of research time.

For long term investments selecting a stock because they pay dividends is an issue for debate. And has been debated for years by many. After the market crash of 1929 and the depression that followed investors were fearful of the markets. For those that did venture back into the markets in the years that followed companies that paid dividends to their shareholders were viewed as "safer" choices over those that did not.

But what if the stock you own in your long term IRA, 401K, etc. pays dividends but the performance of the stock price lags the major markets in performance over the long term? Is it still a good investment choice? The answer is no.

Opening up a financial statement from your brokerage at the end of the year and seeing that dividend payment made into your account may look nice and may provide a "comfort" to you seeing that there but you must step back and look at the company from the perspective of how the price of the stock is growing, or not.

Is the growth of the share price going up over time? Is it declining? Or is it just hanging around the same price year after year? These are important questions you must ask yourself. And you need to ask these questions in a frame of mind removed from the old school belief that a company that pays dividends is safer than those that don't. Look at it only from the perspective of "is my money growing" at a good rate year over year. If you hold a stock in a long term investment account and the share price never seems to grow much, or worse yet does not grow at all, and even still worse is dropping then what are you holding it for? Are you attached to the stock, in love with the company, or fancy it for other reasons? You can never fall in love with a company or hold onto an investment for reasons of tradition or feeling of an obligation to it. You must always be objective when viewing your holdings. And the most important question always needs to be "is this making me money year over year" ? And don't say yes if it earns you less than a few percent a year. Keep your money moving, keep it in the high growth sectors and companies. And when the growth of a company has become tired then move your money out before your money becomes tired too and dies along with the company a slow death.

William O'Niel, the founder of Investors Business Daily sums up dividends like this:

"Dividends and P/E ratios aren't as important as earnings per share growth. In
many cases, the more a company pays in dividends, the weaker it may be. It
may have to pay high interest rates to replenish funds paid out in the form
of dividends. Better-performing companies will typically not issue
dividends. Instead, they reinvest their capital into research and
development or other corporate improvements. Also, keep in mind that you can
lose the amount of a dividend in one or two days' fluctuation in the price
of the stock. As for P/E ratios, a low P/E is probably low because the
company's past record is inferior. Most stocks sell for what they're worth
at the time."

Also said by William O'Niel:

"It's also risky and possibly foolish to say to yourself, "I'm not worried
about my stocks being down because they are good stocks, and I'm still getting
my dividends." Good stocks bought at the wrong time can go down as much as poor stocks, and it's possible they might not be such good stocks in the first place.
It may just be your personal opinion that they're good. Furthermore, if a stock
is down 35% in value, isn't it rather absurd to say you're all right because you
are getting a 4% dividend yield? a 35% loss plus a 4% income gain equals a
whopping 31% net loss.

To be a successful investor, you must face facts and stop rationalizing and
hoping. No one emotionally wants to take losses, but to increase your chances of
success in the stock market, you have to do many things you don't want to do.
Develop precise rules and hard-nosed selling disciplines, and you'll gain a
major advantage."