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About personal finance, investments and markets.
October 21, 2014

Update on dividend stocks: Avoid the crowded trades

Large cap staples are like AAA rated super seniors of 2007. The perception of „safe“ assets embeds huge risk because the beta adjusted downside is enormous (asymmetric risk). Investors fell in love with these stocks because of the perceived safety and high dividend yield. But safety is only a question of value, not of a given sector or even less of a high dividend yield.

This week, investors in McDonalds, Coke and also IBM experienced share price losses of up to -10% on the day of their Q3 results announcement*. McDonalds even reported 30% earnings decline, destroying its bond-like status in one fell swoop. Investors have now started to look beyond the buy-backs and dividend subterfuge that have kept these stocks at levels disconnected from reality for too long. As we have pointed out in a previous article (see here), dividend yield is not a good criteria to pick stocks. We continue to believe that „dividend stocks“ in general are overvalued.

Why did the numbers disappoint? These 3 companies share the same problem: their core business is flat or even shrinking. By the way, this is true for a third of all the companies in the Dow Jones Industrials Average Index. According to data from S&P Capital IQ 1/3 of companies have posted shrinking or flat revenues over the past 12 months. Equally disappointing, nearly half the companies didn’t outpace the U.S. inflation rate of 1.7%. Although we prefer large cap US stocks relative to small caps, investors should not blindly buy any blue chips – too many companies are now ex-growth. We can show you how to position your portfolio accordingly.

* We did not own any of these 3 stocks in our client accounts.

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