The Joy of A High Yielding Dividend Stock

Right now, Royal Dutch Shell trades at a 5% dividend yield. For every $70 share you purchase, you get $3.60 in annual income. Although I expect the dividend to rise in the next year, let’s assume that the quarterly dividend stays static at $0.90 per share (in the interest of conservatism).

Under those assumptions, each share of Royal Dutch Shell purchased today stands to collect $7.20 in total, cumulative dividends over the next two years. Why is that important from a principal protection standpoint? Because it only takes a few years of collecting solidly high dividends to severely mitigate the risk that falling stock prices can have in making you feel as if you are moving backwards.

This year, the stock hit a high price of $74.95. It hit a low of $65.02. Depending on the reinvestment price, it would only take a little over two years of dividends to completely wipe out the “risk” of buying at this year’s high and putting you on the path to being even when the share price hits a low.

I mention this because, once you start collecting five or six years worth of dividends on a stock, the risk of losing money in a disaster scenario becomes severely mitigated.

For instance, let’s review The Financial Crisis of 2008-2009, arguably the worst recession since The Great Depression (although it could potentially take third place to the recession in 1973-1974). When stock market gurus want to point out the “dangers of the marketplace”, they  might say: “Look, the stock fell from a high of $88.70 in 2008 to a low of $38.30 in 2009. The system is rigged!”

Not quite the full picture, though. Those kind of scenarios assume you bought a cyclical stock at an all-time high, right before the second-worst economic conditions our country has seen in the past century.

But the effects would have been much more moderate if you had been a long-term shareholder of a company going into The Great Depression.

Picture someone who had owned Royal Dutch Shell for six years heading into The Great Recession.

If you bought 100 shares of Royal Dutch Shell at the all-time high price of $52.70 in 2003, you would have seemingly been looking at a loss around 30% when the all-time lows of $38.30 came around in 2009.

But now let’s take a look at the full picture and take into account the dividends that got paid from 2003 to 2009.

In 2003, each share collected $1.95 in total dividends.

In 2004, each share picked up $2.11.

For 2005, it was $3.03.

By 2006, that figure was $2.44.

By 2007, the amount was $2.81.

In 2008, each share produced $3.12 in income.

And in 2009, each share produced $3.36 in dividends.

Each share of Royal Dutch Shell collected $18.82 in total dividends from 2003 through 2009.

If you paid the highest price possible for Royal Dutch Shell in 2003, you would have seemingly seen your total investment decrease in value from $5,270 to $3,830 at the lows. But you have to take into account the $1,882 dividends that Royal Dutch Shell paid out during that period. For the investor that bought Shell in 2003, he would have actually possessed $5,712 in wealth from his investment when the shares bottomed at $38.30. In a cyclical investment at the bottom of the worst crisis in 100 years, you would have been up 5-10% on your total investment if you had been a shareholder for five years.

And that is a comparison from the high of 2003 to the absolute valuation low that the stock has seen in my lifetime.

(Author’s Note: My current data source won’t tell me when Shell hit its low of $38.30. My guess is that it might have been in the second quarter of 2009. If that is the case, you would want to manually subtract the last two dividend payouts to get a more accurate figure).

A lot of times, people avoid stocks because they can be volatile. But if you can find excellent businesses giving you a decently high payout, it only takes a couple of years of dividend payouts to insulate you from the worst case scenarios. A lumbering 5% yielder, or a 3% yielder with a high dividend growth rate, will produce a good amount of income that could very well make you net profitable during the low prices of a recession that hits four or five years later.

In the short term, the ride from an overvalued high to an undervalued low may look extreme. That’s why comparisons between 2007 and 2009 prices on a lot of stocks can seem “scary”, for those of you who don’t like seeing 50% swings in the net worth of your stock holdings. But if pay a “fair” price for a stock and factor in five years or so worth of dividends, the potential pain of a recession may not be as bad as you think from a net worth perspective. Time plus dividends can overcome a lot of bullshit that surrounds you. At least, it’s something to keep in mind as you evaluate volatility in the context of your stock market investments.