Ignorance is Often Normal and Foolhardy
Just because ignorance is normal, we shouldn’t remain in ignorance. The phrase “ignorance is bliss” is really quite strange. It can mean a lack of knowledge makes you happy because you aren’t burdened by bad news or have to worry needlessly. Generally, you might be more comfortable if you don’t know something. However, most of life is not well lived in ignorance. One area of ignorance has to do with dividends and the various pieces of the dividend puzzle.
When I am helping new investors, both young and old, I often learn that they do not understand dividends or the various pieces that make a dividend a good thing or a very bad thing. Therefore, in this and a couple of future posts, I hope to talk about four essentials related to dividends and why each is essential. The first topic will be “dividend yield.” This is expressed as a percentage.
Why Does this Matter?
Investments (stocks, bonds, ETFs, mutual funds, savings) don’t have value unless there is some way to use them to pay for the necessities of life or to increase your ability to be generous to others. So, if you are a retiree or you just want to be financially independent, you need a “strategy that should meet the following goals: 1. Produce sufficiently high income to meet basic needs; 2. Preserve capital in bad times (relatively speaking); and 3. Provide reasonably high growth for long-term wealth preservation.” (Source: Seeking Alpha)
What is Dividend Yield?
According to Investopedia, dividend yield is “a financial ratio (dividend/price) that shows how much a company (or an ETF or mutual fund) pays out in dividends each year relative to its market price. By way of example, Microsoft (MSFT) has a price per share of $259.58 (07/01/22 close). The next dividend will be $0.62 per share. This means the Annual Payout (FWD) is $2.48 because it is expected that MSFT will pay at least this amount each quarter for four quarters. Therefore, $0.62 times four is $2.48. Unless something happens to Microsoft’s business, they will have sufficient profits to maintain or increase the dividend. More on that in a future post!
How to Calculate Dividend Yield
To calculate MSFT’s dividend yield you need to know how to divide two numbers. MSFT’s yield is $2.48/$259.58 which is a dividend yield of 0.96%. If the price of MSFT’s shares goes up, the yield will drop. If the share price drops, the yield increases. However, the dollar amount each shareholder receives for each share remains the same. MSFT’s yield is less than the yield on our current saving’s account at Ally Bank. It is 1.0%. However, MSFT stock price could go up dramatically, making it a better long-term investment if the economy and inflation continue to grow.
Some Cautions Are Needed
Never assume that the higher the yield, the better the investment. For example, IBM and HPE are in the same business sector as MSFT (Information Technology) and they have yields of 4.60% and 3.70% respectively. This does not make IBM a better investment than MSFT. The same is true of information technology companies TXN, CSCO, and GLW. So while I own shares of MSFT as a dividend growth investor, yield is not the only consideration.
Bear in mind, however, that there may be investments with a higher yield that are better than MSFT. For example, Cindie and I own 3,100 shares of HPQ which has a dividend yield of 2.96%, which is almost three times the yield of MSFT. (3,100 shares times $1.00 per share gives us $3,100 in income from our HPQ shares.) I think HPQ is a better investment at this time. We have $99K invested in HPQ and only $39K in MSFT shares at the current per share prices.
A General Rule About Dividend Yield
There is a stock that currently has a dividend yield of 12.79%. It is NCMI (National CineMedia, Inc.) NCMI is an awful investment. There are a number of reasons I rate it as awful. It is a micro-cap advertising company with negative earnings and a high risk that the dividend will be cut or suspended. The general Wall Street consensus is that NCMI is a “buy” but that is a highly speculative opinion. The “short interest” ratio for this company is 7.09%. Any short interest greater than 1-2% is an indication that there are a large number of investors who think the share price will drop even more in the days ahead. Therefore, not only is it likely that the dividend will be cut or eliminated, but you will also lose value. Your shares worth $0.94 each today might be worth less than $0.50 per share in a month. Also note that the price of NCMI shares is down almost 82% in the last year. If you bought shares in 2013 you paid around $19 per share. Ouch!
So, if I was ignorant, I would say, “Wow! I can buy 100 shares of NCMI for $94 and that $94 will yield 12.79%. The reality is that the investment will probably fail to deliver. Don’t believe everything Wall Street or your broker recommends.
Dividend Ignorance is not the Worst Form of Ignorance
Sadly, far too many people are ignorant of the truths God has communicated in the book we call “God’s Word.” The Bible says that we should have “former ignorance.” That means we know the truth God has declared and that we choose to agree with him and refuse to continue to live in ignorance.
“Therefore, preparing your minds for action, and being sober-minded, set your hope fully on the grace that will be brought to you at the revelation of Jesus Christ. As obedient children, do not be conformed to the passions of your former ignorance, but as he who called you is holy, you also be holy in all your conduct, since it is written, ‘You shall be holy, for I am holy.’” 1 Peter 1:13-16
Bonus Link Regarding Alzheimer’s and Ignorance is Bliss
As I was looking at “ignorance” using DuckDuckGo, I stumbled on a nice short video: Alice: Ignorance is Bliss by Thomas McNaught. It is a short video about his grandmother, Alice Whinnett. Link to Ignorance is Bliss.
All scripture passages are from the English Standard Version except as otherwise noted.