By Chris Hanson
When the North End’s “Skinny House” went on the market a couple of years ago, I jumped at the chance to take a look. I’ve always wanted to live in a historic house, but I quickly learned that the house wasn’t everything it is cracked up to be. Stock investors need to apply that theory to dividend paying stocks – just because a company pays a dividend, it does not mean it’s the best investment for you.
Let’s talk about the Skinny House first. According to folklore, around 1880, two brothers inherited a plot of land from their father. One brother built a huge house occupying most of the land, leaving a tiny sliver for his brother, who was overseas at war. When the soldier brother returned, he was furious and built the skinny house to block his brother’s views of the waterfront and the sunrise. Family fights can get really nasty, but maybe the small house wasn’t considered so small back then. Today, the house is completely updated and situated in one of the city’s coolest neighborhoods.
On the day of the open house, I quickly learned the charming house wasn’t for me. I’m 6’3 and the house has low ceilings. I barely fit my size 48 shoulders up the staircases. Also, the real estate agent warned me that looky-loo tourists take pictures outside at all hours of the day. As a local celebrity, that’s quite a stumbling block. I imagined pictures of me, the pre-coffee Wicked Smart Investor sporting an unyielding bed-head splashed across the tabloids. I’d lose my charm quickly. The last straw against the skinny house is that I could not do anything to enlarge anything; there was simply no place to grow.
Houses aren’t the only thing that lack growth opportunities; frequently, mature stocks can have the same problem. One sign of lackluster growth prospects could be paying out dividends. Let’s be careful here; companies pay out dividends for a variety of reasons. I am only speaking about one scenario.
As dividends are a portion of profits that are paid to shareholders, a high dividend percentage could be a sign that the company has little room to grow by reinvesting in itself. Management makes the calculation that shareholders may have better investment opportunities elsewhere and decides to distribute earnings. So, if you prefer to make returns by investing in fast growth companies, a dividend could be a sign that the stock is not for you.
Let’s take a look at some companies paying dividends in recently year: Apple, Microsoft, Exxon Mobil, and Wells Fargo. Many consider Apple and Microsoft to be growth stocks, but there is plenty of debate. There is more consensus on Exxon Mobil and Wells Fargo that these are not growth stocks.
Companies not paying dividends recently include Amazon, Biogen, and Google. All of these firms are widely considered to be growth stocks. Again, there could always be exceptions.
In the larger picture, dividend-paying stocks do have a place as part of a broadly diversified portfolio. Long-term investors will likely enjoy both the substantial appreciation of fast-growing companies as well as the dividends paid by lower risk companies. Diversifying your holdings further with bonds, international stocks, and other holdings reduce risks. Again, since companies pay dividends for a variety of reasons, don’t try to read too much into the payout tea leaves. Work with your advisor to define your goals and select investments that match the goals.
The Skinny House was eventually sold for $1.25 million. It was a rare opportunity to score a house on the Freedom Trail. I’ll just have to keep looking.
