Do You have Dead Money?
Research for Online Investors

by John Dalt

5/24/11

Many investors like to buy great dividend paying stocks and hold them.  We do this in our Long-Term Portfolio to great effect.  But when does owning a dividend paying stock become “Dead Money?”

Warren Buffet and others may buy a Blue Chip like Coca Cola (KO) with the expectation of increasing dividends in the future.  Coca-Cola pays a 2.8% dividend, based on today’s market price.  The quarterly dividend is $0.47 per share.  This was an increase from $0.44 per quarter last year.  KO has increased their dividend every year for 48 consecutive years.  In 2006, the dividend was $0.31 per quarter.  The stock sold for $43.58 five years ago this week.  The dividend at that time represented a 2.84% return.

Many “Buy and Hold” investors look at the present return (in dividends) on the long ago purchase price.  On this basis, today’s dividend rate returns 4.31%  If you hold it long enough, the dividend will represent 10…20…maybe even a 30% return on the purchase made many years ago.

The problem here is; you have dead money.  We believe return must be calculated against present stock values, not the purchase price at an earlier time.  Compounding is a wonderful concept, but who among us would not switch to a higher yielding bond or C.D. as old ones came up for renewal.  Shouldn’t we do the same with our stock investments?

KO is quoted at $67.71 today.  If you would have bought KO at $43.58 in May of 2006, you would have received $7.84 in dividends per share.  We believe an astute investor is better to sell KO at this time, booking a 73% return in five years.  The present 2.8% dividend yield does not reward your money in present day dollars.

There are other dividend paying stocks that are just as safe, with a higher percentage return.  What is the likelihood of KO giving us additional share price appreciation from the present $67.71?  We would advise to sell this ‘dead money’ stock and reinvest the money in a stock that pays a higher dividend yield and offers the possibility of capital appreciation.

This calculation is influenced by whether you hold KO in a tax sheltered account.  Many of the arguments to hold stocks long term for dividends assume a taxable event if stocks are sold for capital gains.

We are reviewing the present yields on the stocks in our Long-Term Portfolio.  We do this constantly to find the laggards that should be culled out and replaced with better yields and potential.

We don’t like ‘dead money’ and we want our opportunity costs as low as possible.  I advise you do the same.

The mailbag:
Pay no Fed tax means you shouldn’t get to vote in Fed elections.  We need to change the focus from paying for benefits to reducing their lavishness and scope.  Our rich nation simply does not have the money to pay for all the services our countrymen demand of our governments; whether federal, state or local.  The answer is not more revenue; it's fewer benefits.—subscriber J.R.

John’s reply:  You surprise me.  I support a return to property taxes and elimination of income taxes.  The Washington politicians realized over 150 years ago this constrained the growth of government.  Lincoln had to impose an income tax to pay for the Civil War.  The constitution expressly forbids the imposition of a tax on labor (income).  The sixteenth amendment (ratified under Wilson in 1913) and the twenty-fourth amendment (ratified under Johnson in 1964) allowed an income tax to pay for an expanded government and guaranteed the right to vote to those that did not pay taxes…and here we are.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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