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No Virginia There Are No Safe Dividends

Posted by: Howard Silverblatt on May 18, 2009

I received a letter that said I am 78 years old. My financial advisers say dividends are safe. Please tell me the truth, are dividends safe? Signed Virginia

Virginia, your financial advisers are wrong. They have been affected by a blindness that prevents them from seeing, much less accepting or understanding, risk. They do not believe except [what] they have seen. They think that nothing can be which has not been and that dividends are an inalienable right of stock ownership. That once they are started they can never be taken away. No, Virginia, there is no such thing as a safe dividend. Whether they be regular, special or capital gains, they are not totally safe. Dividends exist as certainly as cash flow and profits permit, but must be forfeited to both when the imperiled entity is in danger. Alas! how dreary would be the market be if dividends were all safe. There would be no risk therefore all investments would pay the same, no comparative trade off, no need for so much of the fixed income world, and never a flight to safety.

But good dividends do exist Virginia, and while none may be totally safe, many offer such a rich history and are so deeply engulfed in their corporate culture that they are among the last of corporate expenditures to be sacrificed. The true secret, in both good times, which seem so far gone and so far in yet in come, and bad times, is to discover those companies that can and will most likely continue to pay their dividend, and therefore be not a guarantee, but a rightful trade-off between the higher yields and those that will permit us to sleep well at night. Is this relailst? Ah, Virginia, in this entire world there is nothing else as real and abiding as a regular cash payment that permits us to take it for granted and not even think of it, but realistic, NO. You must always remain studious and realize that there is nothing for nothing, and that at best you can get what you pay for; there are no bargains without risk. Dividend investing lives, and will live. A dozen years from now, Virginia, nay, a dozen time a dozen years from now, dividends will continue to pay, perhaps not all, but most.

So Virginia, I point you to a starting place, on our web site, for you and your financial advisers. A list of companies that are rich in payments, but not high in yield, having earnings that have paid for those dividends, and, as best as can be currently estimated, are expected to continue to earn enough to pay their dividend. But Virginia there are no guarantees and risk exists everywhere, which you must accept and then manage.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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