The Most Forgiving Investment to Buy

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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 overbought market.

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 losses.  

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 a sell-off.   

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 payers.

McDonald's ( MCD ) and JDS Uniphase (NASDAQ: JDSU ) offer a compelling example in contrasts. I use these two companies because I'm familiar with their histories from a professional viewpoint. 

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 dividends. 

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 can overpay.  



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: MCD

Wyatt Investment Research

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