Updated: Feb 26, 2020
“ Reading articles such as: Top dividend stocks you can buy and hold forever can be dangerous, you still need to be vigilant and do your homework”
By: Allan R Kirby
I have seen so many articles on the subject of `Top dividend stocks you can buy and hold forever`, these articles sometime even use one of Warren Buffett more popular quotes “Our favorite holding period is forever”. Yes this is a great quote but I think it`s often taken out of context with many income minded professionals. Because even Warren Buffett changes his mind and sells stocks, take IBM as an example. Just because you find a dividend stock that has a history of increasing dividends and currently has a good entry point does not in itself mean you should buy.
“Even stock with an apparent high barrier to entry can still be disrupted at some point, nothings impossible."
For example at one time I am sure Ford or GM were both considered dividend stocks to buy and hold forever. The barriers to entry where so high that many investors and the auto industry itself believed it was insulated from disruptors. Unfortunately for them, customer demand and tastes shifted quickly from traditional vehicles to more eco friendly cars. This caught the auto industry off guard and provided an opportunity. Then came the impossible, a new entrant Tesla - A modern eco friendly vehicle manufacturer that has steadily been taking market share from the likes of Ford and GM. Tesla has also been adding various new models for sale while steadily increasing unit production of their vehicles. Today many long term holders of GM and Ford are faced with the fact that Tesla is now worth more than both companies. GM has in fact been retreating from many markets and closing down factories while Tesla expands.
“Looking to the past is great when evaluating a dividend stock but it’s the future that counts the most."
My point is that no one ever thought this could happen but it did and this is a great lesson that looking to the past is great but it’s the future which counts the most. Tesla has shown that even in cases where barriers to entry may seem impossible, they can be overcome. This puts pressure on the likes of GM and calls into question their viability long term. As a buy and hold forever income investor, would you stick it out with GM and Ford? It’s a good question and one many income investors will need to think about. But take stock picking guru Jim Cramer, host of "Mad Money" on CNBC, even he is behind Tesla and not the legacy automakers. Secondly Tesla has shown that any barriers to entry can be overcome. Could this be the case for other industries such as the oil industry, health care or even the financial industry?
The prevailing thought for income investors is to look at a dividend stock and review the company using a number of metrics. However betting on a dividend stock with a history of strong fundamentals, steady dividend increases and even good technicals does not mean it will continue like this forever. A financially healthy, well-managed company even when it appears they have great prospects for long term growth, may end up being a terrible investment. Unfortunately you may not realize this until it’s too late and you get hit with a dividend cut like GE, (GE slashes 119-year old dividend to a penny).
“No magic formula for predicting a company’s long term success."
There is really no true buy and hold forever strategy for a given dividend stock. Yes there can be wild fluctuations in the value of the stock over time and you could even see a few bad quarters but that is normal. However if you do want to own and hold a dividend stock for income over the long term, you still need to do your homework, be vigilant and keep yourself up to date on what is going on with the company, the industry it belongs to, current trends and economics all of which might also affect the company’s long term success. You also need to do something that can incredibly difficult to overcome for many retail investors, checking your emotions and selling when you see warning signs. Mr. Market will dictate the stock price regardless of how loyal you are to a company and its stock.
So the next time you see an article suggesting a great dividend stock or set of dividend stocks you could buy and hold forever, take it with a grain of salt. You need to understand there is no magic formula for predicting a company’s long term success. That great buy and hold dividend stock you thought would last forever could end up being a terrible investment. GE is a sad example of how thousands of people who spent decades working at and investing in General Electric. These people had placed their financial dependability on the success of the company only to see them lose out. It was a tough lesson to learn but one that has shown the buy and hold forever strategy may not always work and can sometime hit at the worst possible moment, in your retirement.