You see tons of social media posts touting the stocks with the highest quarterly dividend. Coca Cola and AT&T are often cited as being great stocks to own because of the high dividends they provide shareholders.The reality is that dividend income is an almost irrelevant component of owning a stock. There can be a huge opportunity cost of owning a stock just for its high dividend yield and is the wrong thing to be focusing on when making investments. Before talking about the misconceptions surrounding high dividend stocks, let’s start by defining what a stock dividend is:
What is a Dividend?
A dividend is simply a reward a company gives its shareholders in return for owning their stock for an extended period of time. The reward most commonly comes in the form of quarterly cash payments, but some companies also offer shares of stock. In this article, we will focus on the companies that pay cash dividends.
Dividend Income Relatively Inconsequential
You see posts everywhere how Warren Buffet makes almost $7000 per minute from Coca Cola dividend income. He also owns about 9% of the whole company, which means he has several billion dollars worth of shares. Coca Cola offers 40 cents a share per quarter to shareholders (Buffet probably gets a better deal because of his stake size).If you owned $46,000 worth of Coca Cola, at $46 a share (current trading price roughly), you would own 1000 shares. This is a pretty sizable position for the average person, and it only yields $400 per quarter, which is only about $133 per month. Nothing life-changing, it might be able to pay for your utilities for that quarter.
Focus on the Stock Trend, Not the Dividend
What you should instead be focused on is buying stocks that have shares with a high probability of appreciating in value in the near future. Obvious statement, but so many people get caught up in a stock’s dividend instead of the actual trend of the stock.If you owned 1000 shares of Coca Cola, you should be more focused on the probability of the stock going up or down 2 dollars a share that quarter, which is making or losing $2000, instead of the $400 you get in dividend income. If the stock goes down just $.40 a share that quarter, your dividend income is gone and you are at breakeven.
There are way more efficient uses of that $45,000 that is tied up in yielding you just $400 per quarter, which can easily be canceled out by a small fluctuation in the stock price. The reason we prefer day trading and swing trading is because of the potential to make much larger returns in a short period of time. Once you develop the skill and become consistently profitable, you would never consider trading AT&T or Coca Cola stock.If you look at the daily of Coca Cola, it is not a stock that I would be buying or trading. You want to buy stocks that are trending on their daily and weekly time frames if you are a longer-term investor/swing trader. Coca Cola has been very choppy for the last few years and has no range or volatility to capitalize on. It is not worth holding for the dividend either. Coca Cola’s shares have actually lost about 10% in value since mid-February, and they raised their dividend from $.39 to $.40 a share to try to appease unhappy investors. This was just a meaningless attempt to appease unhappy investors, and the dividend change barely does anything to offset their losses.
Dividends are not a bad thing. If you can find a stock that appreciates in share value and has a dividend, great. Just sure it isn’t the primary reason why you do or do not make an investment. Focus instead on finding the most efficient use of your capital. Think about where you could put your money that would yield the highest return in the shortest period of time. Don’t buy a stock just because of the size of its dividend.