So you’ve zeroed in on a nice dividend paying stock. And you’ve done your due diligence. The stock pays a nice dividend. Better yet, it has a good history of dividend increases. And you’ve determined they can keep paying the dividend. Your stock has passed all your tests.
That’s great! Now just do this one final gut check before you buy it.
And the gut check is simple. Here it is. Do you understand what the company does, and do you think there will continue to be a demand for their products (or services) in the future? Because this is the only way they will continue to be profitable. And that is the only way they will continue to have money to pay you the dividends.
So what do we mean with all of that?
Well, take Clorox for example. Clorox makes bleach that you probably use when you wash your clothes. People have been washing their clothes with Clorox bleach for many years in the past. And people will keep washing their clothes in the future. And they will probably keep using Clorox.
Even if there is another recession, or god forbid, a depression, or the stock market tanks, or there’s a major war, people are going to keep washing their clothes. And Clorox will keep selling them bleach. So it’s a pretty safe bet that Clorox will be able to keep paying you a dividend.
Or take Hershey, the chocolate bar producer. People have been buying Hershey chocolate bars for years. They will keep buying Hershey chocolate in years to come. Even if there is a huge problem with the economy, they will keep buying chocolate bars. Maybe more because they are depressed.
Everyone knows about these company’s products. And they are visible. You see Hershey’s chocolate bars at the grocery store checkout counter all of the time. And you see the bottles of Clorox in the detergent aisle of the grocery store every time you shop. Indeed, you see these so often you may not even think of them much.
They are actually kind of boring.
And that is a good thing. Boring is beautiful when it comes to dividend paying stocks. Indeed, this is something Peter Lynch, one of the all-time great stock investors said. Specifically, he said, “A company that does boring things is almost as good as a company that has a boring name, and both together is terrific.” He made a habit of buying stocks of products he knew. Or products his family told him about. Boring stocks.
Ditto for Warren Buffett, probably the greatest investor of all time. He buys what he understands. So some of his major holdings are Coca-Cola, Gillette razors, and See’s Candies. There’s nothing exciting to see here.
Just profit. And money.
So this is the final gut check for you before buying a dividend stock. It’s not a hard and fast rule. And there will be some worthwhile exceptions.
But I’d favor the stocks where you understand the company’s product. And they seem to have a long, solid past. And a similar, unremarkable future, of just paying you that increasing dividend, over and over, year after year.
Because with dividend paying stocks, that’s a great thing.
Boring is beautiful.