Time and again we have seen outsized dividends hold off sellers and stop declines. We have seen the power of reinvesting dividends to compound your gains.
And we know that dividends have provided about half the return that investors have gotten in the last 10 years, a dismal decade for investing. If you pick stocks with good dividends, you are on the right track to successful investing.
Ah, but here's the catch. It's the phrase "good dividends," because we have found that not all dividends are created equal.
Take the sorry case of Supervalu (SVU), one of the largest supermarket chains in the nation and a company that had told us over and over that it was confident in its dividend and that it understood how important it was to shareholders.
Remember, when stocks go down, yields become larger as the dividend stays the same size but the divisor (old-fashioned arithmetic) becomes smaller. Hence you get a bigger yield from the division.
Few stocks in the S&P 500 had a bigger dividend than Supervalu going into today's session, not because the dividend was outsized but because the stock had shrunk.
Today we found out what happens when we see this process play out for companies that have battered balance sheets and declining fortunes. The dividend gets slashed, or in this case eliminated, despite all protestations to the contrary that anything like that could occur--including assurances given to me on CNBC last year by the CEO.Craig Herkert, the CEO, when asked about why the company eliminated the dividend, cited "holistic" reasons for the decision, whatever the heck that is. All I can say is it was a mighty bitter pill for shareholders, many of whom relied on that dividend as an important source of income.
That $0.30 yearly, while not making up for the hideous two-thirds decline in the stock since 2008, did routinely draw buyers with each reiteration of confidence that the CEO made.
There are some important lessons here. First, the supermarket industry has gotten incredibly difficult, a combination of dollar stores becoming more competitive in name-brand offerings, Target and Wal-Mart moving aggressively into the space, and Whole Foods taking the high-end consumer from mainstream shops such as Kroger, Safeway, and Supervalu.
But second, and most important, is that sometimes outsized yields like Supervalu's are out-and-out red flags signaling their own reduction or elimination. So do the homework before blindly buying into management's assurances, before thinking, "How can I miss with that yield protection?"
Supervalu was clearly in a long-term spiral down, something that told you to be more skeptical of the company's "confidence" in the dividend than you might otherwise be concerned about.
To me it's another clear-cut case of the need not for buy-and-hold, the preferred conventional wisdom of graybeards everywhere, but buy-and-homework. If you had done the homework, I believe you could bet that management couldn't fulfill its assurances, and you could have sidestepped Supervalu's hideous losses, the worst in the S&P 500 yesterday.
Disclosures: Cramer's charitable trust has no positions in the stocks mentioned.
