As dividend investors, while it is important to focus on dividends, it is also equally important to monitor the risk of capital erosion over a period of time. Dividend growth and intermediate sustainability is good, but it is less likely to be a substitute for significant loss of capital. Pfizer and GE are examples of capital erosion. These two companies were not only able to sustain their dividends but kept with their growth in last decade. However, the value of individual’s holding kept eroding over the last decade or so. For example:
- PFE was trading around $43 per share from 1999 to 2002. In last couple of years, it has been trading around $16. At the same time, it has paid cumulative dividends of only $8.22 per share.
- GE was trading around $40 per share from 1999 to 2002. In last couple of years, it has been trading around $18. At the same time, it has paid cumulative dividends on only $9.00 per share.
In recent days, four companies viz. BP, Johnson & Johnson, and Procter & Gamble, and Toyota Motors are (were) getting quite a bit of attention in news media. Rarely a day goes by when their woes, or management response to product issues, are not discussed in the financial media or general TV news channels. Three of these four corporations also happen to the good dividend paying companies. continue reading rest of the article….
It is close of five year now that I have been a long term buy and hold, and dividend growth focused investor. When I meet friends, acquaintances, or colleagues, on many occasions the discussion starts from what’s market doing today and steers towards trading/investing is nothing but a poker game. I get a sense that many of these folks think that buying (and selling) stocks is just a gamble of some kind. Irrespective of this, I believe both, trading and investing, have their own set of pros and cons depending upon what context an individual is looking at it. In the end, both trading and investing is done to make money. Some use approach of capital appreciation, some use dividend income, some do trades to generate income. The key is to have a plan and execute it with consistent results.
When it comes to dividend investing, many individuals think of high yields (perhaps Cramerica syndrome!). It shows lack of patience and tendency to read too much into the business media. They do not understand dividend growth and sustainability.
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It is important that companies continue to raise it dividend year after year. In addition, it is also critical to make sure we understand that companies can sustain their dividends. Following are four companies that recently announced their quarterly results. Based on these results, it seems their dividends are covered and can be sustained.
Procter & Gamble Company (PG): The 4Q09 earning per share was $0.80 (vs. $0.84 in 3Q09).
- The key highlight was reduced earnings on q-o-q and y-o-y basis (vs. $0.92 in 4Q08) and reduced revenue.
- For year 2009, EPS increased by 17% to $3.64 (from $4.26). This increase is due to sale of Folger’s business unit.
- Yearly dividend of $1.76/share is well covered with earnings. Payout ratio is at 41%.
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This article was originally published on The DIV-Net, on May 28, 2009.
Like many of us, I like reading wisdoms of well know individuals who have been there, done this, done that, and have shown success in their fields. In addition, to the literal meaning of those wisdoms or observation, I like understand the essence of it and put into my own perspective. A while back, I came across P&G CEO A. G. Lafley’s observations in his book “The Game Changer: How You Can Drive Revenue and Profit Growth with Innovation”. He talks about two schools of thoughts viz., business school thinking and design school approach. continue reading rest of the article….