Investors are a hopeful bunch.
Indeed, my experience leads me to believe that they’re more hopeful than most.
That can be good . . . and it can be really bad.
You buy a stock, and you hope the share price will double sooner than later. You hope the dividend stream will rise year after year.
No matter how thorough and thoughtful your analysis, though, sometimes the hoped-for outcome fails to materialize as planned.
The stock price falls. You hope for a rebound.
In some instances, you’ll get it, but usually because the fundamentals remained sound. Patience was all that was needed.
Your hope kept you invested, and rightly so.
In one instance, the odds of a rebound are close to nil.
Hope all you want, it will be to no avail.
I present the dreaded dividend cut.
It’s an event every income investor dreads. The pain delivered is twofold: the income stream shrivels, the principal value of the investment tanks.
Nokia’s Dividend Cut
Nokia (NYSE: NOK) is the latest example.
The large Finnish telecom announced quarterly financial results earlier this week. The results were underwhelming, but hardly devastating.
Nokia reported earnings per share of €0.01, two euros ahead of most estimates. Revenue beat most estimates, posting at €5.69 billion.
But the so-so quarterly numbers were only softening jabs to the body. The knockout punch was delivered when management said it would suspend the dividend.
No dividend will be forthcoming in the third and fourth quarters. It’s unlikely one will be forthcoming next year (if ever).
How did Nokia investors react?
Many reacted with a mad dash for the exits.
Nokia shares ended trading yesterday down 25%. The company shed nearly €6 billion ($6.7 billion) of equity-market value.
Many investors left, but many more stayed. I suspect that the more hopeful ones are the ones still clutching their Nokia shares.
Hope, in this case, will likely breed eternal misery.
I’ve been investing for nearly 30 years. I have NEVER seen anything good arise from a dividend cut (or elimination).
You’ll be persuaded to think otherwise. Management will couch the dividend cut in happy-face, hope-infused language.
Here’s how Nokia management attempted to persuade investors to hang on:
We have a powerful, end-to-end portfolio that allows us to benefit from 5G investments across all network domains. We have a demonstrated ability to drive value and cash flow through product leadership.
That’s laughable given the massive sell-off.
What followed was insulting in light of the dividend cut:
These advantages give me [Nokia CEO Rajeev Suri] confidence in our ability to create value for our shareholders and achieve our longer-term operating margin target.
I hold little hope that Nokia investors will reclaim the value lost yesterday. The data support my pessimism.
Ned Davis Research crunched the numbers and found that dividend cutters and eliminators were the worst-performing category over the period studied (1972 through 2018). No other category produced an average annual loss.
|Dividend-Stock Category||Average Annual Return|
|Dividend Growers & Initiators||9.62%|
|Dividend Payers (No Change)||6.88%|
|Dividend Cutters & Eliminators||-0.79%|
Source: Ned Davis Research
Here’s your No. 1 rule: Always SELL a dividend stock that cuts or eliminates its dividend. Don’t hold on and hope for the best. If you do, hope is sure to breed eternal misery.