Are Dividend Stocks Dead?

New York Stock Exchange, lower Manhattan, New York City.
Photo: Oliver Quillia for
New York Stock Exchange, lower Manhattan, New York City.

Eat this, not that. Fat, thin. Hot, not. Good, evil. You're either with us or against us. Liberal, conservative. Subsidize, take it private.

Dichotomy has swallowed our collective brain.

With black-and-white coloring the national discourse on just about everything, it is no surprise that we have had a gaggle of market geeks calling the end of the dividend stock rally for much of the year.

Truth be told, I don't pay much attention to these types of rallies. Most long-term investors should not either.

While I don't necessarily advocate buy-and-hold (because, by and large, it is dead), it's even more insane to chase what's hot. You'll be in dividend stocks one day, real estate plays the next, and utilities when the market turns bear. Unless you have loads of information, tons of time, and considerable resources, it's not easy to win with such a fluid strategy.

No matter the market, it comes down to stock picking.

Ask folks who, five years ago when it did not appear quite as crazy, threw money at Hewlett-Packard, Dell and Cisco Systems how things turned out. All three stocks have shed heavy double-digits, whereas an investment in the Nasdaq 100 index via the Powershares QQQ ETF would have returned greater than 20 percent.

Bull market, bear market. Dividends hot or not. You have to pick the right stocks.

Consider something I read over at The Motley Fool the other day.

One of their guys, in making a bull case for Microsoft on value, wrote that the stock "enjoys" a 3.2-percent dividend yield. Enjoys.

Since that piece posted, that "enjoyable" yield lifted to 3.4 percent. That's supposed to be a good thing?

The same author pointed to Microsoft's price-to-earnings ratio. When he wrote the article, it was 15.3 (trailing 12 months). As of Friday's close, it's down to 14.3.

An even better value, right?


Investors likely exist who run scans for declining P/E and rising dividend yields. From there, they make the case, like the guy at The Motley Fool did, that they have a value stock on their hands. One that's set to "possibly see their shares rise over the next year by over 25 percent."

That's what the dude wrote.

Maybe it will happen. I bet against it, but I can't say for certain.

What I can tell you — flat out — is that the method of seeking value Motley relayed will set you on the trail of losers like Hewlett, Dell, Cisco, and, dare I say, Research In Motion.

Look for growth that, ultimately, contradicts the case for value. In other words, sure, it's technically a "value stock" because it's mispriced, but the story here is not value — it's the growth.

Why take a chance on Microsoft with declining revenue growth, when you can buy any number of strong dividend payers? Growing companies that just so happen to pay a dividend.

Names such as Whole Foods Market. Sure it pays a lower yield, but that is because it is a strong growth stock.

Or, if you really want what the "experts" call value, have a look at Apple. There's not a stronger growth and value play out there right now. That falling P/E and climbing yield mean something.

But Apple, in a good way, is a special situation.

As a rule of thumb, you're insane to chase yield or make yourself believe in a faux value play. Buy growth and hold it until you hit your target or the company's narrative actually begins to crumble.

You'll miss a few and take some stop losses in the process, but that's part of the game. Getting crushed by the next Hewlett, Dell or RIM should not be.

Dividend stocks are absolutely not dead; just as long as the fundamentals of the underlying company are moving in the right direction.

—By Contributor Rocco Pendola

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