At Motley Fool, bad information and skewed research are the topic of the day.
Good ol’ Mathew Emmert over at Motley fool posted an article this week, which you can read here, that states that “dividend stocks beat the market.” Whoopdie freakin’ doo. We’ve all heard this before, even some people here at Investor Geeks believe in the dividend stocks, which is fine, however, let me explain why this article is full of crap.
He quotes Jeremy Seigel’s book, “The Future of Investors” to make his claim, which states that “Siegel found that an investment in the 100 highest-yielding S&P 500 stocks would have beaten the index by more than 3 percentage points per year, returning more than 14% annually from 1957 to 2003.” Ok, what’s wrong with this picture?
Before I start ripping this, I’ll just state here in it’s own tidy paragraph that there is nothing wrong with dividend stocks and, depending on the company, they could be good investments. Now that the dividend loving crowd is happy, let’s start ripping this article to shreds, shall we?
First of all, using this theory, you need to be invested in 100 different stocks to pull this return (I’m not sure if you have to be equally invested in each or if it was weighted). You also need to reinvest every penny of dividends into all 100 stocks to get this return. More importantly, Peter Lynch was pulling in returns in the 20-24% range in his mutual fund and I have pulled in over 20% a year for the last 5 years running! So, I guess I beat the 100 best dividend stocks by at least 6% a year. I must be a freakin’ genius since, as Mathew said, “Dividend Stocks Beat the Market.” Maybe he should write an article next week titled, “Steve beats Dividend Stocks and the Market.”
Well, of course they beat the market! The market is massively over-diversified. It’s taking massive losses in some stocks that kill the massive gains of others. The market isn’t a good indicator at all in my opinion. It’s nice as a target to be beaten, but the huge diversification ensures a poor return.
This research also assumes that you aren’t trading at all, but rather just sitting in the market, year over year, essentially owning an index fund of the market. If that’s your investment strategy, you need to read more or fire your investment advisor. That’s a horrible strategy.
Needless to say, I should hope the 100 best paying dividend stocks could beat the un-traded market. it would be pretty pathetic if it didn’t. All of this wonderful research never takes into account that if you TRADE and take profits all year long and reinvest those profits you take, you can easily pass 14% returns. That’s a little over 1% a month. Heck, right now I see on Scottrade that you can get a 5% CD for 6 months and pull in 5% from the stock market in 6 months to make yourself 10% a year nearly risk free without spreading your money across 100 stocks, which is a horrible strategy any way you slice it.
Think about it, the article is saying that gaining 1.17% a month is an incredible return! That’s a whopping 23 cent gain on a $20 stock a month. If you can’t find that, you aren’t trying.
The entire basis of the article is what almost all articles and research do when it comes to the market. They take apples and oranges and compare them and do it all using hind sight. I could come up with 100 stocks that kill dividend stocks year over year if I sat down and did it. It’s easy looking backwards. Don’t let articles like this fool you. While it’s interesting, it’s also very unrealistic.
When reading articles, even mine, think about what is being said and think about what it means. Do the math in your head and figure out if it’s realistic. Figure out if someone is looking back at history and using their knowledge of what happened to rewrite history to prove their point. Make up your own mind without someone shoving their view down your throat with these little tricks that they use in their books and articles. Grab a calculator and do the math! A 12% gain is simply 1% a month (it’s even less than 1% if you reinvest your profits, it’s a 0.87% gain per month.) Take bits and pieces of lots of peoples strategies and make your own, but never take an article like the one on Motley Fool this week as fact because it’s usually just a bunch of crap wrapped in a nice package.
Invest in peace…