Today is Dividend Day.
The series where I teach you 5 things about dividend investing in less than 5 minutes.
1️⃣ Dividends = Profit Distributions
It’s a common misconception that paying out a dividend lowers a company’s stock price.
The image shows why that’s not true.
As the profits increase, so does the company’s value.
When they pay a portion of those new earnings as a dividend, in theory, the value goes down by the amount paid out.
You aren't losing stock value, you are just receiving your cut of the business's profit.
2️⃣ Investors Chase Performance
Your biggest enemy in investing?
Your emotions.
They make you feel good buying stocks when they’re expensive.
And selling when they’re cheap.
The image shows that the most money flows into the market after periods of the best performance, and then flows out at the low points.
3️⃣ An Investing Quote
It’s easy to look at a chart in hindsight and swear you’d never make those mistakes.
But when the market actually tanks, it’s incredibly hard to stay logical.
The image above proves that most people can’t.
Peter Lynch says that it’s not because people can’t understand the logic, but because they can’t handle the emotions.
“In the stock market, the most important organ is the stomach. It’s not the brain.”
— Peter Lynch
4️⃣ Low Expectations Lead to High Returns
Researchers looked at stocks with the most optimistic and pessimistic growth forecasts.
They found a predictable cycle:
Analysts overreact: Fast growth makes analysts assume the trend will last forever, the same is true when growth is slow
Nothing lasts forever: The growth trend almost always changes, forcing analysts to cut their optimistic predictions, or raise the pessimistic ones.
Returns are the opposite of expectations: Stocks priced for perfection end up delivering low future returns, and the opposite is true for low expectation stocks.
You can read the whole paper here.
5️⃣ Example of a Dividend Stock
A stock with low expectations right now?
PepsiCo.
Most people think of PepsiCo as just a beverage company, but it actually generates more than half of its revenue from dominant snack brands like Lay's and Doritos.
Sales have been slow, and the market is worried that GLP-1 drugs will reduce snack demand.
Key numbers from Fiscal.ai:
Profit Margin: 10.9%
Forward PE: 15.7x
Dividend Yield: 4.2%
Payout Ratio: 74.7%
P.S.
We’re about to buy a business we believe is becoming better, more predictable, and more profitable.
Before the investment case rolls out, we’ll be celebrating with some limited-time discounted opportunities to become a paid partner.
Make sure you don’t miss it by getting on the waiting list.
I’ll send you a checklist for Chuck Akre’s 3-Legged Stool Framework when you do.
Used sources
Interactive Brokers: Portfolio data and executing all transactions
Fiscal.ai: Financial data
Disclaimer
As a reader of Compounding Dividends, you agree with our disclaimer. You can read the full disclaimer here.