Dividend Blue Chips Gone Bad: GE, Toyota and Altria
The term “Blue Chip” is a relic…
Short-hand for “best of the best,” mutual fund companies once exploited the term left and right, each one showcasing its own “Blue Chip Mutual Fund.”
But when peeking under the hood, it doesn’t take much to realize that they’re nothing more than glorified large-cap index funds.
Unfortunately, many investors think that when buying blue chips, no further thought is required, that safety and equity appreciation are assured.
They couldn’t be more wrong…
When The Chips are Down
Some of these so-called blue-chip stocks are frequently bought for “income” purposes. But if these investors knew the companies were shrinking their dividend payments by 10% per year, I bet they’d be a bit more hesitant to throw the term around so loosely.
For instance, many would consider General Electric (NYSE: GE) to be a “Blue Chip’s Blue Chip.” And despite a tumultuous decade-plus since the departure of the legendary Jack Welch, it remains in the portfolio of many retirees relying on dividends for sustenance.
But what if I told you GE’s average dividend growth rate for the last five years was negative 9.50%? Doesn’t sound so blue chip anymore, does it?
All in all, if you’re living on those dividends and you take the time to factor in a meager inflation rate, you’re losing more than 10% of your purchasing power each year. Hardly a compelling income investment.
Another example is Toyota (NYSE: TM). It may not be a standard name in every blue chip-oriented portfolio, but I know many investors who’ve held on to TM despite some of its troubles. Especially those that invested five or more years ago, back when Toyota was unquestionably the best auto manufacturer on the planet.
But like GE, it’s reduced its dividend to the tune of a negative 11.91% average dividend growth rate over the past five years.
And forget about the stock price, it’s still way down. That’s a big part of the problem…
You see, some dividend-oriented investors employ a purist buy-and-hold mentality. That simply can’t be done.
Seeing a dividend decline by almost 12% per year and watching the stock value decline a cumulative 30% to 35% is downright unfortunate. And all the more so, since it’s also entirely avoidable.
But even stocks that are appreciating exhibit bad dividend behavior….
Take Altria Group (NYSE: MO), largely considered a solid blue chip play. It’s done very well over the last five years, losing less than GE and TM during the financial crisis and appreciating far more since.
But what once looked like a decent dividend growth stock now has an average dividend growth rate of negative 10.12% for the last five years.
Bottom line: Things change for all companies. During the “Golden Years” of stock investing – which frankly was a very short period of time – buying blue chips and keeping them forever may arguably have been a sound strategy.
Now, all stocks must be monitored and regularly re-evaluated. Even those with fundamentals that have “long term” written all over them. Portfolios must be rebalanced and reallocated. And whether investors like it or not, they must be active participants.