“I don’t care about the price, I bought it for the yield.”

First of all, let’s clear up something.

In January of 2018, Exxon Mobil, for example, was slated to pay an out an annual dividend of $3.23, and was priced at roughly $80/share setting the yield at 4.03%. With the 10-year Treasury trading at 2.89%, the higher yield was certainly attractive.

Assuming an individual bought 100 shares at $80 in 2018, “income” of $323 annually would be generated.

Not too shabby.

Fast forward to today with Exxon Mobil trading at roughly $40/share with a current dividend of $3.48/share.

Investment Return (-$4,000.00 ) + Dividends of $323 (Yr 1) and $343 (Yr 2)  = Net Loss of $3,334

That’s not a good investment.

There is another risk, which occurs during “mean reverting” events, that can leave investors stranded,

When things “go wrong,” as they inevitably do, the “dividend” can, and often does, go away.

  • Boeing (BA)
  • Marriott (MAR)
  • Ford (F)
  • Delta (DAL)
  • Freeport-McMoRan (FCX)
  • Darden (DRI)

These companies, and many others, have all recently cut their dividends after a sharp fall in their stock prices.  During the 2008 financial crisis, more than 140 companies decreased or eliminated their dividends to shareholders.  But it wasn’t just 2008. It also occurred during the dot.com bust in 2000. In both periods, while investors lost roughly 50% of their capital, dividends were also cut on average of 12%.

While the current market correction fell almost 30% from its recent peak, what we haven’t seen just yet is the majority of dividend cuts still to come.

Naturally, not every company will cut their dividends. But many will, and in quite a few cases, I would expect dividends to be eliminated entirely to protect cash flows and creditors in many cases.  Many European companies are stopping dividends.

Do you believe that you avoid market volatility by buying high dividend stocks?  Check out this chart that shows, peak to trough, a 40%+ drop this year:

 

 

 

Goldman Sachs said on Monday it expects S&P 500 dividends to fall by 25% in 2020 as certain large dividend-paying industries are particularly vulnerable to the economic shock of the coronavirus outbreak.

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