As the founding editor of Morningstar DividendInvestor, I have to confess to a certain bit of annoyance when I hear the phrase "dividend trade." The idea of using high-quality, high-yielding stocks as vehicles in a short-term game of pops and drops isn't just insulting; it's bad logic. For one thing, these stocks tend to be less volatile than the market overall. If you're trying to trade, isn't more volatility what you want? For another, these dividends are so small relative to how much stock prices fluctuate from day to day. A 4% yield is very good these days, but even that takes a full year to earn, typically in quarterly increments of 1%. For all I know, a stock could go up or down 1% because some hedge fund trader spilled coffee on his keyboard.
Ah, but how very beautiful--and powerful--dividends become when we add the magic ingredients of time and inaction. That's not a misprint: Inaction is very important aspect of our strategy!
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Josh Peters, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.