DIVIDENDS: THE DOWNSIDE.

Daughter, Me, Grandson and the New Generation.

One Generation Leaves and Another Shows up. They took this picture the day after I got home from Arizona after saying goodbye to my Dad. In the picture above are Cindy and Zachary, Me, and Lucas Orion Crutchfield. I have this thing about babies and the miracle of life. They are so tiny and innocent, yet they have been programed for survival. Truly a blessing from God.

Are You Tired of Listening to Me Preach About Dividends? I still believe in their usefulness; however, I do believe I should let you know some of the pitfalls of this approach and give you some ideas about how to manage them.

1. The Dividend May Not Continue. I have not hidden this fact; however, the fact that some companies have a long history of quarterly dividends, does not prevent them from reducing them or even eliminating them all together. The past two years have seen strong companies like Pfizer, General Electric, and Dow Chemical cut dividends. General Electric and Dow Chemical CEOs virtually promised continued dividends at current levels only to drastically reduce them a short time later. The lesson here is that, rather than depend on what the executives say, do your own evaluation of the company's ability to continue dividends. Looking at things about the percentage of cash flow the company is paying out in dividends or the amount of cash and debt on the company balance sheet will give you an independent measure of the probability that the dividend will continue.

2. Sell Right After Dividend Cut. This is not a good strategy because not only will your income be reduced because of the dividend cut, the value of your stock will almost certainly drop. If you are unable to predict the dividend cut you stand to lose both income and principal after the cut. In fact, you may be better off buying more at the lower price right after the cut. Statistically, those who buy right after a cut usually do far better than those who sell.

3. Diversification Can Suffer. Although I am not adamant about staying totally diversified, I do believe that concentrating all your investment portfolio in dividend paying companies makes it more difficult to diversify which can increase your overall risk. Unfortunately, many higher dividend stocks tend to be among Real Estate Investment Trusts, Utilities, Master Limited Partnerships, and Business Development Companies. It is difficult to get a diversified portfolio by concentrating on these companies. Even though they pay lower dividends, you are usually well advised to diversify into other industries like telecommunications, energy, and technology Yields in these companies are usually half that of the high dividend industries; however, they still beat the 1-2% paid in banks.

4. Lower Growth Potential. A company that sends out a higher percentage of its cash flow in dividends should be able to earn a higher percentage return on that capital than you can; therefore, in the long term, you might accumulate more wealth by letting the company reinvest your capital than paying you a dividend so that you can reinvest it. This might not always be he case but you should always consider the possibility.

5. Tax Issues. The company has to pay tax on the earnings it distributes to shareholders. You also have to pay tax on the money after you receive it. While dividends received are taxed at a lower rate than ordinary income, this may not always be the case. There is considerable pressure to increase taxes on investment income and the preferred rate may become a thing of the past in an environment where many voters are of the opinion where we need to increase taxes the so-called rich.

I Still Favor Investing For Dividends. But I am aware that there is a downside that has to be managed. Perhaps we can discuss this more in the coming year. Merry Christmas and Happy New Year to all my readers.

TRIBUTE TO MY DAD.

An Early Family Picture of Me at Six With Mom and Dad and Brother.

Most of You Know This. I lost my dad just before Thanksgiving. He was 92 years old. We were close for all 73 years I spent on this planet. He had just turned 19 when I was born so we grew up together. As I was going through his posessions, I came across a copy of this blog post I made almost five years ago. Although he never mentioned it, it must have been important to him for him to print it and save it all these years. It is as true now as it was then. Although he only had a 7th grade education, he taught me as much as I learned in seven years of university education. I decided there could be no tribute to him that is more fitting than my thoughts of almost five years ago.

Sunday, June 17, 2007

THINGS I'VE LEARNED.

From My Dad. It's Father's Day. All the kids and grandkids have either been over here or called me. I received numerous cards, most quite humorous. I am lucky to have such a devoted family, more important to me now than ever as I approach my 70th birthday in a few months. But the main thing that comes into my mind on this day is my own father and the things he taught me. There is no legacy of material goods that can compare with the value of the things he taught me.

1. When You Make a Mistake, Admit It And Do What You Can to Correct It ASAP.
Before I was born, my mom and dad moved to Kentucky so my mom could be with her mother when I was born. My Dad found himself working in the dark misery of a coal mine. Kentucky was rainy and damp and there was little work to be had besides in the coal mines. When I was six weeks old, they made their way back to Colorado where our entire family was better off.

2. There Is Always A Way. Until I was seven years old, we lived in a series of run-down rental properties. Every thing from converted barns to tool sheds. Mom and Dad had no money to buy a home and not enough income to make mortgage payments. When the Mile High Poultry Farm closed down, the company practically gave away their old chicken coops to anyone who would tear them down. Dad acquired several of them and tore them apart piece by piece. We then removed the nails and used the lumber to build the house I grew up in. I followed him around from start to finish. I had a little crow bar (which I still have) and I did what little I could to help. My mother and I removed nails and stacked lumber while Dad worked on the house. That was almost 60 years ago and the house is still being lived in today.

3. How Much You Earn Is Not Important. My Dad became financially independent on very little income. I still can't figure out how he did it. He was frugal but not stingy. He knew the world didn't owe him anything and he went out and worked for everything he got.

4. Being Poor Is a State Of Mind. When I was 12 years old, I used to cross the road in front of our house and lay in the cool green grass under the apple trees. In the fall there were apples every where and I ate all I could but most of them rotted on the ground. One day I got this great idea and I ran home to tell my Mom we should pick up all those apples and give them to poor people. Mom's reply was "Son, we are poor people." Nobody ever told me. There was always an attitude of "we'll get what ever we need." And we did.

5. Teach Your Children to Take Care of Themselves. I have many clients who sacrifice much of their wealth to care for children who are old enough to take care of themselves. I don't know how he taught me this, but from the age of 13, my pride wouldn't let me to ask my Dad for money. I saw how hard he worked for what we had. I knew I was expected to do the same thing. I did my best to earn my keep. I wasn't always able to do this but I never stopped trying.

I guess this is about the best I can do to pay tribute to my Father on this day. In case you think I am referring to a memory, let me tell you the best part. As I approach my 70th birthay, my father is still here. Not just in spirit but in the flesh. He doesn't walk quite as fast and he gets out of his chair slowly but he is still teaching me. He is showing me how to grow old with dignity and pride. As my brother says, "He'll live to throw dirt on both of us." I hope he does.