Wednesday, August 26, 2015
Do not get emotionally attached to a dividend position
As someone who has been investing in, and writing about dividend paying companies for over seven years. I have accumulated a lot of observations about investor behavior. One of the issues I have observed is when investors get emotionally attached to a dividend stock they owned. While it is important to invest in companies you understand and believe in, it is equally important to also know when a company is no longer performing up to par. It is important to objectively evaluate and identify companies in a portfolio that are no longer pulling their weight, in order to stop adding to those companies and possibly even sell them. Failure to do so could result in permanent loss in capital, and permanent loss in capacity to generate dividend income.
Many investors I have interacted with over the years have liked the types of Johnson & Johnson (JNJ), Procter & Gamble (PG), Coca-Cola (KO) to name a few examples of successful dividend growth stocks from the past few decades. And I agree that these companies
are great, with wide moats. strong competitive positions and global platforms for selling branded products at a premium price. However, while these companies are great there is not such a thing as a buy and forget investment.
It is important to monitor your dividend stocks regularly. Monitoring is important, because things change and people cannot predict what will happen to a business 20 years from now, using the information of the past or present. A healthy and growing company today might find itself in a declining industry and have its fortunes decimated. Investors should purchase stocks with the intention of holding on for the long run. However, if any warning signs are spotted investors should not add more funds to position, and even consider selling. Newspapers enjoyed an economic moat for decades. The internet ruined the moat of companies like Gannett (GCI). Other companies might decide to change business model and embrace hot growth industries, while disposing of their core stable cash generating assets in the process. Prime case in point is Enron. Another one was french water utility Vivendi, which turned itself into a media conglomerate.