Last week, General Electric (GE) did something that many never thought would happen. They slashed their dividend to just $0.01 per share.
We are talking about GE. A company which has been bringing “good things to life” for well over 100-years.
There is an important lesson to be learned here by investors who have long bought into the myth of:
“I don’t care about the price, I bought it for the yield.”
First of all, let’s clear up something.
Company ABC is priced at $20/share and pays $1/share in a dividend each year. The dividend yield is 5% which is calculated by dividing the $1 cash dividend by the price of the stock.
Here is the important point. You do NOT receive a “yield.”
What you DO receive is the $1/share in cash paid out each year.
Yield is simply a mathematical calculation.
This is an important point which will become much clearer in just a moment.
In a previous article, I discussed the “Fatal Flaws In Your Financial Plan” which, as you can imagine, generated much debate. One of the more interesting rebuttals was the following:
“‘The single biggest mistake made in financial planning is NOT to include variable rates of return in your planning process.’
This statement puzzles me. If a retired person has a portfolio of high-quality dividend growth stocks, the dividends will most likely increase every single year. Even during the stock market crashes of 2002 and 2008, my dividends continued to increase. It is true that the total value of the portfolio will fluctuate every year, but that is irrelevant since the retired person is living off his dividends and never selling any shares of stock.
Dividends are a wonderful thing, Lance. Dividends usually go up even when the stock market goes down.”
Uhm…that isn’t actually true. But it is a comment which drives to the heart of the “buy and hold” mentality and, along with it, many of the most common investing misconceptions.