Time heals all wounds. But does that include wounds inflicted
by an ill-timed stock purchase?
The answer depends largely on the stock. Some stocks are more
forgiving than others, particularly if you mistakenly buy into an
I speak from experience. I've mistakenly bought investments at
a market top, and I've suffered the consequences: Punishing
losses soon ensued.
But this isn't to say that I necessarily suffered permanent
On the occasions I've ill-timed my purchase, I've found that
the recovery was frequently quicker if the stock was a dividend
payer. Non-dividend payers didn't appear to recover as fast after
I'm not really surprised: Dividend growth stocks tend to trade
within a tighter band than non-dividend paying stocks. They also
tend to be more stable and less volatile than non-dividend
JDS Uniphase (NASDAQ: JDSU
) offer a compelling example in contrasts. I use these two
companies because I'm familiar with their histories from a
Back in the late 1990s, I was recommending McDonald's to
clients, while a colleague of mine was recommending JDS Uniphase.
For awhile, he appeared to have the upper hand, but that quickly
vanished, and we were both suffering from buyer's regret. But
over time, I was able to get over it; he wasn't.
In 1999, McDonald's hit an all-time high of $48 a share to
trade at 35-times earnings. Price appreciation had driven the
yield to below 1%.
A year later, in 2000, JDU Uniphase shares hit an all-time
high of $1,120. JDS was priced solely on blue sky: There were no
earnings - JDS lost $0.54 that year, and had lost money in
previous years. As to be expected, there were no
Both McDonald's and JDS were richly priced. Over subsequent
years, both experienced a punishing sell-off. McDonald's shares
had declined 73% to $13 by 2003. That same year, JDS had tanked
99.7% to $3 a share.
Even though its share price fell, McDonald's continued to pay
and raise its dividend. By 2007, the annual dividend had been
increased to $1.50 per share; its shares were once again trading
at 1999 prices.
McDonald's has to this day raised its dividend, which was
recently hiked to $3.24 a share. This means the 1999 share price
yields 6.75%. Because of the rising payout and low interest
rates, investors are willing to pay $94 for a McDonald's share.
Despite my sin of recommended an overbought McDonald's in
1999, anyone who bought would still have doubled his money. In
addition, he would have collected over $18.60 in per-share
dividends. My wounds eventually healed.
As for the JDS investor, time has done little to heal his
wounds. JDS' shares trade around $14.50, which means they're
still down 99%. A 2000 JDS investor will never breakeven on
his investment. To add insult to injury, he will likely
never receive a dividend either.
Value matters. It always does. But if you overpay on a stock,
dividend-growth stocks are the most forgiving ones for which you