Are Dividends a Thing Again?
META has started paying out dividends to shareholders, for the first time in its history.
Dividend stocks may seem appealing on the face of it, especially for income-conscious investors approaching retirement. Yields are comparable to those of money markets and CD accounts*, with more favorable tax consequences. If you’re feeling adventurous, you can sell a few covered call options and rake in a few more bucks. Plus there’s always the chance that the underlying stock will appreciate in value.
Just be warned. It can also lose value. And as New York Community Bancorp (NYCB) found out last month, when a stock has a dividend miss, the market is extremely unforgiving. Shares dropped 37% percent in a single day, and have now lost half their value compared to the beginning of the year.
If you were wondering what caused Facebook (META) stock to take off about a week ago (I sure as heck did) it was their announcement that they would pay dividends to shareholders, for the first time in their history. They join Apple (AAPL), Microsoft (MSFT), and Nvidia (NVDA) as members of the “Magnificent Seven” club offering dividends — until now, an unusual direction for tech stocks.
You can say this is a sign that the tech is industry is maturing and losing its potential for growth, or you can argue that this is a savvy move to justify sky-high valuations and keep momentum in their favor.
It’s irrelevant unless it signals a broader market trend. That is what has me concerned.
I felt fine buying about $10k worth of Whirlpool (WHR) stock to round out my parents’ portfolio — not much of which is in stocks. The company has been an environmental innovator while managing to meet its earnings targets and consistently pay out over 6% in dividends to shareholders last year. Plus my parents own several of their appliances. Washing machines may not be the most exciting invention anymore, but there will be a need for them anywhere there is electricity and running water.
Arguably a greater need than for computers and the Internet.
The problem is that no one really knows right now what is driving stock valuations, other than the paucity of other good investment options. If the consensus tilts back towards dividends, it will fuel a race to the bottom. Corporate management will have less incentive to re-invest profits for long term growth and employee retention. As a former CEO, I find myself wincing. Cash will get sucked right out of their enterprise and back to a demanding but fickle owner class.
It will be like the 1980s all over again.
Maybe for some people that may be a welcome change, but I can’t believe it spells good news for the 52.3 percent of Americans who own mutual funds. Sure, dividends get reinvested back into these funds, but with most index funds and passive ETFs, they will not see any direct income until they sell their shares.
Is there another way?
Well, maybe. Nothing is really certain these days except for inflation, death, and taxes. My best advice is to keep some money in the bank and keep your home in good repair. If you have the means to diversify, then buy stocks that you like and understand across a range of industries.
* Dividend yields vary a lot. Check the fine print.