As a contrarian investor, the philosophy is quite simple. If you buy a stock when nobody likes it, and then patiently hold it, the market eventually falls in love with it again. The company rights the ship, fixes whatever problems they have, and the patient contrarian investor gets rewarded. While that’s a simplistic view of the process, it’s what every contrarian or deep value investor tries to do.
What I’m struggling with is whether I should limit the Uproar Fund to stocks that only pay a dividend. There are plenty of dividend paying stocks that have been beaten up for whatever reason. Nokia is a great example. When I bought in the mid $9 range, their 40 cent dividend represented close to a 5% yield. If Nokia takes 5 years to double, the dividend adds an additional 25% to total returns.
According to this CNBC article, dividends make up 90% of total stock market returns. Technical analysts will tell you that dividend paying stocks will often find support at a certain dividend yield, giving the dividend investor built in protection on the stock price. Dividends often can protect an investor from fraud, since real cash must be returned to investors every quarter. There are all sorts of blogs and people on the interweb who wouldn’t buy anything but a solid dividend payer with a history of increasing distributions.
Even my investing idols over at Contra The Heard admit a love of dividends. They give companies that pay dividends an extra point in their scoring model. As Benj Gallander says, dividends allow him to be stupider, longer. By getting a dividend, the pain of holding a flat stock is lessened by the quarterly payment. It doesn’t really matter what kind of investor someone is, everyone enjoys dividends.
My heart has always held a special place for dividends. I like receiving them, I just didn’t make it a requirement of an investment. I viewed dividends as a sort of bonus. If the investment paid them, great. If not, I wouldn’t let that stop me from buying an otherwise good investment.
Contrarian names sometimes pay dividends, but most of the time they don’t. Because the stock is beaten down, the dividend has often been cut or eliminated entirely. If I eliminated non dividend payers from the watch list, I’d cut the list by 50-75%. If I lessen the number of stocks in the watch list, it cuts down the number of opportunities drastically. Of course, it also cuts down the amount of work I have to do in research.
I’m currently reading Benj Gallander’s book Contrarian Investors 13. Benj was kind enough to put his entire point system in the book, including explaining how he determines what earns points and what doesn’t. Dividends get a point, as well as about 25 other things. A stock needs 10 points in order for Benj to plunk down cash to buy it. I think I’ll just copy that list. After all, it’s worked pretty well for the Contra guys.
Readers, do you only buy dividend payers? Or are you willing to buy non payers if you like the fundamentals enough. Why or why not?
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