Tuesday, June 18, 2024

A Gross Misconception Among Investors

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A Gross Misconception Among Investors

Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

Marc Lichtenfeld

There is a gross misconception that dividend stocks equal boring stocks.

I've never considered passive income that grows year after year to be boring. But that's just me.

For investors who are constantly chasing the next hot trend, buying a mature company that generates cash flow and returns some of that cash to shareholders can feel like taking melatonin with a glass of wine and turning on C-Span - a snoozefest.

But it doesn't have to.

There are plenty of cutting-edge companies that happen to be established firms with proven business models. And contrary to popular belief, they're often better investments than companies that are in the early growth stage. That's because many young companies need to take on significant debt or sell lots of shares (which dilutes shareholders) to fund their businesses until they become cash flow positive.

When you see a company in a high-growth sector paying a dividend, that tells you that the company is easily able to fund new initiatives, that it can afford to hire the best people and that its business will still be fine even if the new trend turns out to be a fad.

For example, in the AI space, companies like Microsoft (Nasdaq: MSFT) and Broadcom (Nasdaq: AVGO) have been profitable for decades, have the world's best technology and pay consistent dividends.

They've also rewarded shareholders with strong price performance. Microsoft is up nearly 300% in the past five years, and Broadcom has quadrupled in just over a year and a half.

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Chart: Microsoft (Nasdaq: MSFT)
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Nothing boring about those numbers!

Now, those stocks still might fall if we hit a bear market or if AI doesn't become the giant trend we expect. But they'd likely fall way less than earlier-stage companies would - and their dividends would lessen the sting even more.

Beyond AI, there are plenty of other hot trends where investors can get paid dividends while still gaining exposure to game-changing technology. There are even some exchange-traded funds - and a few rare companies - that allow investors to earn dividends from crypto.

I especially like to collect income from the biotech sector.

It's true that biotechs with zero or very few approved products usually don't pay dividends, but there are many biopharma companies with deep product portfolios and pipelines that do.

One of my favorites is AbbVie (NYSE: ABBV), whose stock has more than doubled over the past five years and has a 3.7% yield. If you had bought it seven years ago when the stock was trading in the low $60s, you'd have a double-digit yield today.

Be Smart

I love investing in new technology and exciting trends. But I want to get paid while I do it, and I want to lower my risk as much as possible.

I had a front-row seat for the dot-com boom and bust, and I remember how many companies imploded. Very few of them were dividend payers.

So go ahead and play the hot new trends. But do it the smart way - by buying dividend payers - so you can get income and capital gains.

Good investing,

Marc

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