Dividends Do Matter in Dud Stocks

by Marc Bastow | July 2, 2012 5:45 am

Dividends Do Matter in Dud Stocks

Dividends hold a tremendous allure to the average investor, which helps explain why dividend-paying companies like Exxon Mobil (NYSE:XOM[1]), Chevron (NYSE:CVX[2]), Abbott Laboratories (NYSE:ABT[3]) and McDonald’s (NYSE:MCD[4]) — just to name a few — are among the most widely held stocks in the market.

Of course, picking a stock strictly for the dividends alone isn’t always the best course. After all, what happens if the company’s shares retreat? The dividends are just making up (or worse, not) for your losses! So instead, a wiser idea is to target companies you expect to produce growing revenues and earnings, so it won’t just keep up dividend payouts, but also net you some stock price appreciation.

Long-standing dividend players like Johnson & Johnson (NYSE:JNJ[5]) and IBM (NYSE:IBM[6]) have histories of achieving both, but it is worth noting that some widely held Dow dividend chestnuts have not followed suit — in fact, some have floundered around during the past five years, with investors watching their initial investments languish, even while collecting dividend checks.

For those investors watching their investments lose ground, the dividends really do matter, as the extra income can take a stock from being a “dud” to at least being a positive, contributing member of your portfolio.

Let’s look at five stocks generally considered to be safe, dividend-paying winners that have, in fact, done poorly during the past five years, to see whether the dividend has allowed investors to at least sleep soundly.

In our example, let’s assume we bought 100 shares each, collecting the dividends as paid but without reinvestment.

Company Ticker 6/29/07 VALUE 6/29/12 VALUE Gain/Loss Total Dividends Total Return TOTAL
GAIN/LOSS
DuPont DD $5,084 $4,669 -$415 $818 $5,487 +$403
3M MMM $8,679 $8,716 +$37 $1,050 $9,766 +1,087
Pfizer PFE $2,557 $2,253 -$304 $462 $2,715 +$158
Merck MRK $4,980 $4,068 -$912 $730 $4,798 -$182
AT&T T $4,150 $3,539 -$611 $816 $4,355 +$205

Total returns on four stocks stay well in positive territory despite share losses in three. Merck is the laggard here, providing a total loss of about $200.

Of course, the tradeoff on these appreciation “duds” is the opportunity cost lost by not investing in appreciating dividend stocks like Coca-Cola (NYSE:KO[7]), which is up 47% in five years and could see a pop after its upcoming stock split[8], and Travelers (NYSE:TRV[9]) which is up just under 20% in five years with increasing dividends.

While it certainly pays to invest in dividend stocks and hold them for the long-term income they provide, it also makes sense to research the field and seek out companies that hold promise for share appreciation, too.

Like, say, a few of the stocks up top.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long JNJ, XOM and TRV.

Endnotes:
  1. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM
  2. CVX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVX
  3. ABT: http://studio-5.financialcontent.com/investplace/quote?Symbol=ABT
  4. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  5. JNJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=JNJ
  6. IBM: http://studio-5.financialcontent.com/investplace/quote?Symbol=IBM
  7. KO: http://studio-5.financialcontent.com/investplace/quote?Symbol=KO
  8. could see a pop after its upcoming stock split: http://investorplace.com/2012/04/buy-coca-cola-before-the-split-and-drink-up-big-profits/
  9. TRV: http://studio-5.financialcontent.com/investplace/quote?Symbol=TRV

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