1 Big Dividend Stock That's All Wrong for Beginning Investors
Jun 27th 2012 7:43PM
Updated Jun 27th 2012 7:44PM
Recently, my colleague John Grgurich published an article detailing three big, safe dividend stocks for beginning investors.
While I concede that 3M is a solid choice -- I own shares myself -- and while I believe JPMorgan to be a debatable choice, there are much safer dividend stocks than Gannett. Here are my three primary objections to John's inclusion of Gannett:
1. A safe dividend stock can't have a recent history of dividend cuts.
3M has increased its dividend every single year for more than half a century -- an impressive picture of consistency.
Gannett, however, is just three years removed from a massive dividend cut. In February 2009, the company reduced its quarterly dividend from $0.40 to $0.04 per share. (JPMorgan, too, had to slash its dividend in the financial crisis; it's raised it since, but it remains below 2008 levels.)
Gannett now pays $0.20 per share, and as John suggests, the company has a payout ratio that looks sustainable. However, it's difficult for me to gauge the long-term potential for that dividend to grow because Gannett's core business is undergoing a major disruption as it enters an uncertain new world order for media companies.
2. A high yield can be a bad sign.
Dividend yield is simply the per-share annual dividend divided by the current price. One way of achieving a big yield is, obviously, to have a large dividend payment. The other way is to have a low share price.
John describes Gannett's 6% yield -- more than double what a 30-year Treasury bond is offering -- as "killer." But here's the main reason the yield is so high:
It's not that the dividend is impressively high; it's that the share price has been decimated in the past few years. And that's a sign of the No. 3 concern I have about Gannett.
3. A beginning investor should favor industries with tailwinds, not headwinds.
Newspapers have had a difficult time adapting to the digital age. Print advertising revenue -- Gannett's bread and butter -- declined from $5.2 billion in 2005 to $2.5 billion in 2011, according to the Associated Press. As a result, it has had to lay off nearly 20,000 workers since 2006 to aggressively cut costs.
I agree with John that digital ads and paywalls present growth opportunities for Gannett. But neither area will be able to fully offset those print advertising declines, at least for now.
Beginning investors don't need to wait for Gannett to figure it out. There are far better dividend stocks for their money -- like this list, or like the three detailed in our newest special report, "The 3 Dow Stocks Dividend Investors Need."
The article 1 Big Dividend Stock That's All Wrong for Beginning Investors originally appeared on Fool.com.Fool.com managing editor Brian Richards owns shares of 3M. Follow Brian on Twitter: @brianlrichards. The Motley Fool owns shares of JPMorgan Chase. Motley Fool newsletter services have recommended buying shares of 3M and creating a diagonal call position in 3M. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
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