iBankCoin
18 years in Wall Street, left after finding out it was all horseshit. Founder/ Master and Commander: iBankCoin, finance news and commentary from the future.
Joined Nov 10, 2007
23,426 Blog Posts

Beware of the Dividend Trap

First, let me just say, our government is trying to purposely repeat the mistakes of the Great Depression. It is truly pathetic. The GOP wants austerity and the fucking dems want a trade war with China. They are fucking babies, unfit to lead. But if you think we have it bad, take gander at Europe. Their market losses are 3-4 times ours. The amount of carnage and loss of wealth taking place in Europe is nothing short of staggering.

If you’ve been taking hits, trying to to trade this tape, take a deep breadth and chill the fuck out. Ignore the misfits who offer nothing but vitriol. Again, I hate to constantly beat up on Twitter, but so many of those so called market experts are full of shit. Just so you know, behind the scenes, the managing elite at iBC have been banning a great many people, in order to clean up the site. While you might believe freedom of speech should reign supreme, the truth is, noise must be eliminated from intelligent discussion. I strongly advise that you cease and desist clowning around and get to work.

A lot of people are telling you to buy high dividend paying stocks. As much as I appreciate a good divvy, in a downward spiraling market, dividends are pointless. You will end up losing 10-20% of your principal before you receive your fist payment. What’s the point?

To that point, I screened for large cap stocks, yielding greater than 2%, that are up over the past 3 months. Here are the results:

No. Ticker 3-month Return Dividend Yield Market Cap
1 BMY 8.03 4.20 53,520,000,000
2 OKS 7.09 5.00 9,500,000,000
3 KMB 6.69 3.90 27,820,000,000
4 VFC 6.68 2.10 12,970,000,000
5 DCM 5.89 3.10 75,720,000,000
6 PGN 5.67 4.80 15,240,000,000
7 ED 4.99 4.20 16,700,000,000
8 DUK 4.79 5.00 26,620,000,000
9 SO 4.37 4.50 36,030,000,000
10 BAP 3.72 2.10 7,320,000,000
11 CHL 3.58 3.70 195,500,000,000
12 LO 3.49 4.70 15,320,000,000
13 D 2.74 3.90 28,900,000,000
14 NI 2.50 4.30 6,000,000,000
15 GIS 2.48 3.20 24,770,000,000
16 HSY 2.19 2.30 13,470,000,000
17 EPB 2.03 5.40 7,300,000,000
18 CNP 1.94 4.00 8,360,000,000
19 MO 1.63 6.10 56,680,000,000
20 RAI 1.25 5.70 21,850,000,000
21 MCD 1.10 3.20 90,610,000,000
22 MMP 1.03 5.20 6,810,000,000
23 AEE 0.59 5.20 7,190,000,000
24 CL 0.44 2.60 43,140,000,000
25 TGT 0.38 2.40 32,280,000,000
26 PPL 0.36 4.90 16,490,000,000
27 SCG 0.25 4.80 5,220,000,000
28 NTT -0.17 2.90 63,380,000,000
29 XEL -0.53 4.30 11,770,000,000
30 PEG -0.83 4.10 16,880,000,000

So that’s it, just 30 companies. Before you know it, people will sell them too. Even worse, if the economy worsens, the dividends will be called into question, offering a catalyst for short sellers to press the shares, further fucking you into a murderhole.

If you want safety, you’re better off hedging your longs with shorts. Don’t be afraid to sell short. As you can see, it can be very rewarding.

In the pre-market, shares of MS are getting smashed again, alongside everything else. I do believe we are very close to a sharp bounce. However, I will be very patient with my cash, opting to slowly dollar cost average into select names. For now, the only stocks I will be dollar cost averaging into are WNR-IPGP. But, as sure as I am sitting here, there will be 300% winners off of these lows, once people stop shitting themselves.

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43 comments

  1. JakeGint

    You will end up losing 10-20% of your principal before you receive your fist (sic) payment.

    And that is a very appropriately described payment, indeud.

    _________

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  2. xxxHuggieBearxxx
    xxxHuggieBearxxx

    Let me be clear — HuggieBear is dead.

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  3. FIG

    Don’t look now, NFLX is up pre-market.

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  4. TheMarketAce

    Le Fly,

    What are your thoughts on GSVC in this environment? Is it still a longer term hold for you? Thanks.

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  5. The Big Ragu

    Is MS following the same path as Bear Stearns?
    Someone seems to know something.

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    • jimmy_two_times

      check the options chain. with BSC there was a huge put purchase about 10 OTM the friday before, in the cash month to boot !!

      funny how that never got investigated!!

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  6. jimmy_two_times

    Fly,

    thanks !!! I cant stand taht whole fucking bullshit “paid to wait”. Way to get paid while your capital gets creamed !!!

    Cheers

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  7. Buy & Hold

    I don’t agree.

    If you hedge your dividend portfolio, find companies who have raised their dividends for the past 25 years, and sell call premiums 15% above your purchase price, you can produce yields of 8%-10% fairly easily.

    Of course you can’t trade them, or worry about things like PPT readings, or churn your account chasing TZA and such.

    And it’s a lot easier than hedging longs and shorts in this HFT dominated market.

    It’s easy to say that any long investment in a down market is stupid…why would anyone do that????

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    • Quint

      I think he was referring more to the people who blindly chased these mortgage REITs like NLY.

      Anytime a yield is higher than 6% you should be concerned.

      But your strategy will work also.

      NLY is a big short right now.

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      • ?

        Note on NLY. I can’t remember its’ dividend ever falling below 6%. Most often in double digits. For years. If you don’t need to sell it to raise funds your cost basis is of less importance though it is always best to buy at a reasonable price. I have collected a good return for many years and will add a bit as we drop. The current leverage is low by their historic standards. Their biggest risk is loss of access to short term refinance money. This was not a problem in ’08 so it is a possible but not probable difficulty going forward.

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        • Quint

          Yes, in the past it worked, but the high yield should have been a warning that one day your principal would be hit big time.

          Just be careful about continuing dividend cuts. Curve flattening and mortgage prepayments from Operation Twist means they can’t sustain their current dividend…

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          • ?

            Agreed.
            They can increase their leverage (under 8x last time I checked) and cushion the drop.
            Spreads are going to narrow.
            No use arguing against that.
            Prepayments have been reasonable considering the historic low rates. Difficulty in qualifying has the main issue.
            Government intervention is always a worry.
            We all knew that the recent rate spread was not continuing forever…….

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          • Quint

            “increase their leverage”…careful, that’s what Dick Fuld thought too.

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  8. FIG

    sold out of DRV just now. Looking to enter on the long side again.

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  9. xxxHuggieBearxxx
    xxxHuggieBearxxx

    Lets have a good ole fashion Clam bake. I’ll bring the libations.

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  10. idiot

    Good advise.. wish i had subscribed to this theory 2 months ago before I went all in on high yield junk that has cost me 20% of my cash.. the 0.8% I have got back in dividends is great though.. at least I can put some gas in the car with that.. FML

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  11. Ozark Hillbilly

    Fly, I think even you might be surprised by the number of retail investors that simply look for high yield stocks without doing any sort of critical thinking about what they’re getting into. What’s worse, is that you can hardly talk any sense into anybody that thinks this is the way to get some earnings in their IRA accounts, after being decimated by plummeting interest rates.

    The REIT’s are the worst offenders, no doubt. They should just go ahead and make a Fed REIT, full of all the malls in America that The Bernacke is going to own in a couple of years.

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  12. Vegas Trader II

    Sold DRV @ 17.45, bought @ 14.42 Better safe, than sorry.. Def. going to buy more after we bounce..

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  13. xxxHuggieBearxxx
    xxxHuggieBearxxx

    fucking criminals

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  14. ALLPROz

    TLT and VXX still climbing…until they pull back the waters are shark infested.

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  15. kinz

    fly why are you not picking wnr up at these levels?

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  16. Ruben the Cuban

    I pointed out last week that ARO was holding up pretty well. I picked some up this morning as it is ripping higher even in this crappy tape. Something is going on there, but I can’t find any headlines. I didn’t want to come off the sidelines today, but it’s hard to argue with the price action.

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  17. ?

    This is the tape that the long term crowd waits for. Good businesses on sale. Too soon to deploy more than a portion of your dry powder though.

    Hopefully everyone has a plan in place. A plan devised before the emotion of the moment arrived.

    The above applies only to investors.
    Day traders and other short term types have their own game plan and I wish them all success.

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  18. Bigmike

    Sir Fly,

    How do you feel about today’s meltdown? Are you buying at these levels?
    I’ve covered a good chunk of my shorts and thinking of scouting for short-term long opportunities. I agree as well, we are way oversold.
    Kind of worries me shorting when Cramer and Kudlow are bearish.

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  19. J

    This shit reminds me of the currency carry trade. I never went near them, but our bank at one time thought they were going to get big in the currency game and hired a bunch of prop traders “specializing” in carry trades. They were taken out in stretchers in 6 months. Smelling a rat i didn’t even go near those fuckers as the smell of death could have carried over to me.

    Going for the div is like the carry trade. Divs and div growth are basically the result of stronger earnings and even if they paid or ploughed back in the firm it will be reflected in the stock price anyways.

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  20. FIG

    Gotta wait for capitulation. A slow grind lower like we have seen won’t cause capitulation. I am now all cash waiting for said capitulation.

    Minue 200-300 won’t do it, we need a -500+ move.

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  21. panamaorange

    Only a few good “non-staple” dividend stocks out there right now. MT and RTN for example.

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    • Buy & Hold

      I’ve got a list of over 50 names with high dividends that I monitor. But it take fundamental work and the market has gotten away from that.

      I wouldn’t touch any of the defense sector names…unfunded pensions will be a problem. And I stay US.

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  22. big snacks

    russell 2000 is very strong today.. worst on the way down is usually first to turn

    good sign

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  23. JakeGint

    More Words of Wisdom from the Most Statist President We’ve Ever Had:

    (Transcript from Good Morning America interview)

    GEORGE STEPHANOPOULOS: You might have a new issue on your plate over the weekend. Bank of America now is doing a $5 service fee for using your debit cards. Drawing– a lot of outrage, a lot of questions. And basically the questions boil down to what Vikki Manko of Naperville, Illinois asks. “These are the types of things government should get involved in and put a stop to.” Can you put a stop to that?

    PRESIDENT OBAMA: Well– what we did was we put a stop through– The Financial Reform Act of them charging fees– for credit cards.

    GEORGE STEPHANOPOULOS: And the banks are saying–

    PRESIDENT OBAMA: And so– Well– what– what the banks are saying is– that “Rather than take a little bit less of a profit. Rather than paying multimillion dollar bonuses. Let’s treat our customers right.” And this is exactly why we need this consumer finance– protection bureau that we set up that is ready to go. And what we need is a confirmation of the person I’ve appointed, Rich Cordray treasurer of Ohio. Back in Ohio, Republicans and Democrats both think he’s terrific and he’s fair. But this is exactly why we need somebody who’s sole job it is to prevent this kind of stuff from happening.

    GEORGE STEPHANOPOULOS: Can you stop this service charge?

    PRESIDENT OBAMA: Well, you can stop it because it– if you– if you say to the banks, “You don’t have some inherent right just to– you know, get a certain amount of profit. If your customers– are being mistreated. That you have to treat them fairly and transparently.” And– and my hope is is that you’re going to see a bunch of– the banks, who say to themselves, “You know what? This is actually not good business practice.” Banks can make money. They can succeed, the old-fashioned way, by earning it. By lending to small businesses. By lending to consumers. By making sure that– you know, we are building the economy together. But– you know, without the kinds of protections that we’re starting to see the Republicans try to roll back– we’re going to continue to have these kinds of problems. And this is exactly– the sort of stuff that folks are frustrated by. This, by the way, is an example of the– the contrasting visions that we have. If– if– if– the Republican Party believes that we should do nothing to curb abuses on Wall Street and roll back regulations put in place to prevent the next big financial crisis, well, I’ve got a big difference with them. And I think the American people are going to be on my side on that.

    ______________

    The guys is just… staggeringly… unbelievable.

    _______________

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    • DMG

      Dontcha know, there’s no difference between Republican & Democrats.
      The next asshat who says that will feel my wrath.
      Dodd, Frank, Durbin et al…what do they have in common?

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  24. ?

    Starting a small position in RIG. Not looking to enter into any company trading much above its’ ’08 low.

    Buy list at the ready.

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  25. Yabollox

    If you are a trader or spend a lot of time watching and positioning then the divvy is almost negligible. But if you are involved in other day to day activities you need a place to park your cash and investments. What to choose? CDs?, Annuities? Whole life type stuff? Bond fund? YOu are not going to manage this stuff day to day…. so why not buy solid dividend paying corps? Sure the price of the shares may swing, and it can drive you crazy when it drops. But you are still gonna get the 6% from T or v on the money you put in initially, and in months or years the price of the shares will recover. And that’s your time frame anyway.

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    • ?

      Agreed.

      For the long term investor volatility is your friend. It allows you to buy in at better prices.

      Your only fear is permanent loss of capital. So you still need to do the work and just not buy the best yield.

      The daily tape is not your enemy or your concern.

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  26. Largebill

    You are, of course, correct that dividend doesn’t matter if your loss of principal is greater than the dividend. However, I’m not sure I’d lump them all together. Utilities would seem somewhat immune to the market swings. Full disclosure: DUK is a long term hold with dividend reinvestment. Not a sexy investment, but safest one I’ve held long term. When it comes to piece of mind and sleeping at night, it helps to have a nice chunk of change in something relatively safe.

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