What I Regret About My Dividend Investing Journey

Samuel Smith

Summary

• Dividend investing has been a fantastic wealth-creating and learning experience for me.
• However, I have my fair share of regrets as well.
• I detail 7 of my biggest regrets from my dividend investing journey.

I love pursuing a blend of dividend growth investing, high-yield investing, and value investing. This is because I believe that high-yield stocks are the easiest to value accurately, given that long-term growth is one of the hardest things to project in a company. Businesses that are not big growth companies but instead deliver the vast majority of their returns via dividend payments are the closest things to bonds in terms of value, which inherently are much easier to assess.

Then the question simply becomes a matter of whether they can sustain their dividend payout, generate a little bit of growth as equities, and beyond that, capture valuation-multiple expansion and use market volatility to your advantage. Insisting on some dividend growth also helps drive capital appreciation as well as provide an income stream that can keep up with inflation over time.

Finally, value investing is extremely important, especially when dealing with slower-growth, higher-yielding stocks, because if you do not buy on a value basis, you are unlikely to get attractive total returns. When a company is growing very slowly, it is rare that the market gets irrationally exuberant about it. While this approach has served me very well and has enabled me to outperform the S&P 500 (SPY) and the Schwab U.S. Dividend Equity ETF (SCHD) over time, I have had my fair share of regrets along the way. In this article, I will detail seven of my biggest regrets in my dividend investing journey.

Regret 1

One of the biggest regrets is not paying proper attention to the balance sheet of the company. When investing in dividend stocks, especially high-yield dividend stocks, it is tempting to simply look at payout ratio, and if the payout ratio is low, it is tempting to think that the dividend is very safe, even if other aspects of the business, such as its balance sheet, are on questionable footing. The thought goes that even if the business suffers a bit, it has such a large cash flow buffer that it is unlikely to cut the dividend. In fact, many times, management will reiterate that the dividend is a top priority for them, even if their balance sheet is running into trouble.

I learned this the hard way with companies like Algonquin Power & Utilities (AQN), Lumen Technologies (LUMN), and NextEra Energy Partners (XIFR), as all three were stocks where their dividends were fully covered by cash flows, and management repeatedly emphasized to investors that their dividend was extremely important to them as part of their capital allocation strategy. However, in all three cases, their balance sheets were in very bad shape, ultimately forcing them to cut dividends several times, in the case of AQN, and outright eliminate them in the case of LUMN and NEP. Fortunately, in the case of LUMN and NEP, I sold well ahead of the dividend cut and avoided major losses, but in the case of AQN, I did not, and I got burned badly.

Regret 2

Another important lesson is the durability and defensiveness of the business model. A classic example was the Class A and C mall REITs like CBL Properties (CBL), Washington Prime Group (WPG), and Pennsylvania REIT (PEI) in the lead-up to COVID-19. All those businesses had significant dividend coverage ratios, what appeared to be considerable cash flow visibility, and even pretty strong balance sheets for mall REITs. However, their businesses were not durable, as they were disrupted by e-commerce, leading to many of their assets entering into death spirals that ultimately overwhelmed them and forced them into bankruptcy. Fortunately, I did not get burned, but I was tempted to dip my toe in several times. Instead, Class A mall REITs like Simon Property Group (SPG), which had much higher quality and better-located assets along with a stellar balance sheet, weathered the storm and survived.

Another example of a business that had a fairly durable model but was not defensive enough to sustain its dividend was Hanesbrands (HBI). It had a very low payout ratio and seemed like a bargain, but its business was cyclical, and it got hit by a perfect storm of macro headwinds and a cyberattack that forced it to eliminate its dividend. Dow Inc. (DOW) is another example, as it had a decent balance sheet and good dividend coverage but was hit by a long industry downturn, forcing it to slash its dividend. I avoided getting burned by that one, though I hold industry peer LyondellBasell (LYB), which has held up better and even continued to grow its dividend, though its payout is on increasingly shaky ground, and I expect a cut if the industry does not turn around soon.

Regret 3

A third regret is chasing yield. Sometimes the dividend coverage looks comfortable, the balance sheet appears solid, and the business model looks quality, but the yield is still unusually high. The market rarely gives away high yields without reason. Where there is smoke, there is often fire. An example of this right now is United Parcel Service (UPS). While UPS insists its dividend is rock solid, with a strong balance sheet and clear moat, it faces a challenging turnaround, uncertainty from tariffs, and shifting trade flows. It may work out, but I believe chasing it now is too much like yield-chasing rather than sound fundamental investing.

Regret 4

A fourth regret is underestimating the importance of dividend growth. It is tempting to think that a stock with a high yield does not need much dividend growth. However, the power of compounding works best when yield and growth work together. High yield provides a floor for the stock price, while growth protects the dividend, the balance sheet, and the business model. Whirlpool (WHR) and Leggett & Platt (LEG) are examples of stocks that had too much dependence on dividend growth but eventually cut payouts. On the flip side, mortgage REITs (MORT) like Arbor Realty Trust (ABR) and Annaly Capital (NLY), as well as business development companies like FS KKR Capital (FSK), lure investors with sky-high yields but cannot grow dividends much at all due to paying out nearly all earnings, while being highly interest-rate sensitive and dependent on financial engineering. Covered call ETFs like the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) also look attractive with high yields but have limited growth due to capped upside from selling calls.

Regret 5

A fifth regret is not fully understanding what type of dividend stock I was investing in. Cyclicals require careful timing, strong balance sheets, and should not be held forever. Stalwarts are my bread and butter, providing higher yields and more sustainability, though with slower growth. Long-term compounders, like Apple (AAPL), Microsoft (MSFT), Blackstone (BX), and Brookfield Asset Management (BAM), are innovators that continually extend growth runways. These are the ones I am least likely to sell, as they deliver the compounding power that drives long-term wealth.

Regret 6

Another regret I have is over-weighting a single sector. It is easy to become overconfident that a single sector has everything going for it, and while that may be true in the short term, unforeseen circumstances can torpedo investment theses. For example, I was very bullish on midstream (AMLP) heading into COVID and ended up getting hit quite hard initially because energy prices collapsed, and with them, the prices of many of my investments. My conviction did not waver, and I doubled down, ultimately making all the money back and much more coming out of COVID. That being said, while I like midstream stocks such as MPLX (MPLX), Energy Transfer (ET), and Enterprise Products Partners (EPD), and believe that they check my boxes for what makes an ideal investment, it is still important to maintain proper diversification so that if such an event happens again, I am not overexposed and suffering massive losses in a short period of time.

Regret 7

Last but not least, one of my regrets is not being suspicious enough about a stock. If the investment story looks great and everything seems to check out, I still need to remain highly suspicious. This harkens back to not chasing yield as well as not being overweight in a single sector, but it is also a broader principle for investing. The reality is that Mr. Market is often wrong, but he is never stupid. That means there is always a good reason for how he prices a stock, and it is important to identify what the bear case is for any stock before buying it.

Investor Takeaway

High-yield investing is a great way to combine the best qualities of dividend growth investing and value investing and has helped me to achieve significant long-term total return outperformance