Wall Street would like us to believe that a 4% dividend is a good yield on your money that competes between bonds and stocks.
That’s because we’ve been in such a low interest rate environment for so long that venturing out from traditional income vehicles like blue chip dividend paying stocks, CDs, bonds and money markets into alternative investments is just not how most brokerages and banks are geared for.
Do you know how many 4%-paying big name stocks are big-time losers? A lot! I’ll get more into that below. After working for some of the biggest wire houses in the business, looking back, I can see how the brokerage community gets comfortable with such low yield equity investments.
They are complacent about hunting out the great stories with the big yields and strong upside potential because the stories about many of these hybrid securities are harder to understand and harder to tell than just pitching Pfizer to their clients. Today, Pfizer is the most widely held stock in America. The white-shoe firms will tell you the stock is a safe haven, suitable for widows and orphans, right? Sure.
You just buy it and put it away…right. Well I don’t know about you, but a 3% yield on my income and growth money stinks and this type of dividend strategy is a loser. Shares of Pfizer, America’s most widely held stock, have fallen from $47 to $27, or -47%, since 2001. This story topped out in 1999 with the new bull market in generic drugs took off. The stock is hitting multi-year lows and millions of U.S. investors seem to still be in love with it. Am I missing something? Sell the pig and move on.
Oh yeah, you got your 3% dividend for the past five years for a cumulative 15% return, before taxes. But you still took it in the hind quarters for 27% while the market has made recovery highs from the tech bust, the recession and 911 during that same time period.
And Pfizer is just one of many well-known Wall Street favorites paying 3% that have been nothing more than dead money for the past five years. General Motors is another mega cap stock with a yield that used to top out at over 8%!
But then again, the GM has fallen from $68 to $34, or more than 50%, during the past five years while Toyota, Honda and Nissan keep taking market share every day. The second major problem is the sucking sound everyone is hearing at GM is the cost of maintaining their behemoth pension plan for tens of thousands of retired workers.
The company has $278 billion in debt, only $15 billion in cash and will lose more than $7 per share in earnings in 2005 alone. No way can GM afford to maintain the dividend at current rates, meaning you can expect the company to perform triage in the months ahead by probably eliminating its dividend all together.
In fact, big investors like Kirk Kerkorian, who has seen his 7.8% stake in GM plummet over the last two years, is insisting that GM cut their dividend big time to help turn things around.
Throw in the fact that their leading parts supplier Delphi Automotive is now in bankruptcy and that the company is about to divest itself of its crown jewel, GMAC Finance, and you’re left with dysfunctional car company mired in debt.
Like I said the list of big name dead money stocks is long and illustrious. Seem some investors don’t mind getting crushed as long as they get their dividends in yesterday’s stocks whose best years are history. There’s been some real doozies in the past five years.
How about these all-American names listed below. At one time, about ten or fifteen years ago, these stocks were some of fortress names to own. The typical dividend investor of the past twenty years would have given this portfolio a five-star rating, given the quality of the underlying companies. But not any more…not for the past five years. These are the kinds of 3% income stocks Wall Street is still pushing on their clients. Talk about getting bagged.
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What we really have here is a list of fifteen big losers, ten of which are current components of the Dow! Not exactly comforting.
Ten or fifteen years ago, the above portfolio was the absolute rage of big blue chip investors. I’m talking institutional Barbie dolls. But a quick view of each chart will show one crushed name after another. This portfolio today, my friends, is like dragging around a bag of rocks. It’s dead money.
So it’s important not to fall into this trap that a 2%-5% dividend stream is somehow going to protect the underlying common stock from falling out of bed. Far from it folks. It’s a common story heard time and time again, income and growth investors holding on to former Wall Street darlings, only to see their principle erode badly over time.
The lesson here is that there is no room for complacency, not even in the mega cap stocks that make up the Dow Jones Industrial Average. Nothing hurts more than getting burned in supposedly blue chip stocks that are supposedly suitable for Grandma.
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Sincerely,
Bryan Perry
ChangeWave’s 25% Cash Machine