What's the downside to this

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dreamrider
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What's the downside to this

Post by dreamrider » Tue Mar 24, 2020 4:24 pm

Yesterday Chevron stock had a 10% dividend yield. I considered buying the stock for the dividends mainly but the stock is attractive because it took a 60% beating.

I was looking at adding Chevron as 5% of my portfolio. Chevron has been paying dividends since the 30s. I'm betting the stock dividends payment will outweigh the stock price risk.

What's the downside to owning this stock and getting a 10% dividend every year in this scenario?

jebmke
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Re: What's the downside to this

Post by jebmke » Tue Mar 24, 2020 4:26 pm

they could cut the dividend
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bloom2708
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Re: What's the downside to this

Post by bloom2708 » Tue Mar 24, 2020 4:26 pm

The downside is the dividend could be cut to $0 and the stock could continue to go down. Nobody knows.

Several companies have cut dividends already. Oil has been hit hard.

Advice would be to buy the Total market. Chevron is in there at the market cap weight.
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Tamarind
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Re: What's the downside to this

Post by Tamarind » Tue Mar 24, 2020 4:30 pm

Potential downside: Chevron slashes it's dividend due to an extended collapse of oil prices. The stock drops as dividend followers dump it and because of the aforementioned collapse of oil prices. You are left holding a stick e that is worth much less and won't pay you any dividend at all.

Momus
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Re: What's the downside to this

Post by Momus » Tue Mar 24, 2020 4:30 pm

Chevron stock $66

After distributing 10%/yr dividend. It becomes $59.4 stock + $6.6 dividend to you. If it doesn't go nowhere. Do you really make any money?

That's dividend payout essentially.

dbr
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Re: What's the downside to this

Post by dbr » Tue Mar 24, 2020 4:33 pm

As a general rule a plunging stock price and a resulting high yield are the kiss of death for a company. But this is a unique and extreme period in time, so no one can say what the outcome will be. Oil prices were already falling and now the economy is contracting. Buying this stock now thinking it is a way to cash in on a 10% dividend would be foolish. More likely outcomes are that the stock price stays down and the dividend is cut or that eventually the stock price goes back up and the yield returns to a normal value. In that case you make out like a bandit on the price recovery, eventually.

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WoodSpinner
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Re: What's the downside to this

Post by WoodSpinner » Tue Mar 24, 2020 4:37 pm

OP,

Have you done any research on the company itself? It’s culture? Financials? Reserves? Unique Risks? Large Projects? Cashflow?

Do you know much about the Oil Industry? It’s competitors?

These are things I would want to know before buying their stock.

WoodSpinner

NotTooDeepLearning
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Re: What's the downside to this

Post by NotTooDeepLearning » Tue Mar 24, 2020 4:40 pm

Something crazy could happen like oil dropping to $20 a barrel when the entire company was built around $60/barrel oil. Imagine that!

Boglegrappler
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Re: What's the downside to this

Post by Boglegrappler » Tue Mar 24, 2020 4:42 pm

The current yield on the S&P 500 is about 2.38%.

When a stock is yielding 10%, the market is telling you that it (the market) expects the dividend to be reduced.

You can buy it anyway, and maybe earnings will stay high enough to continue to pay the dividend. If so, the stock will recover some. Its worth noting that oil company yields were much higher than the market average before this recent price dislocation.

Its also worth noting that, despite what the company CEO just said about the dividend being a top priority, in situations where companies are not earning what they expected, and the stock is yielding far more than the yield on other companies, its not uncommon for the Board and the CEO to conclude that: the dividend is not "helping" the stock price, its costing them a lot of cash that they could use internally for debt service and other expenses, and so it makes sense to reduce or eliminate it.

Buy at your own risk. It might work out, but I don't think its the way to bet.

Edited to add: In cases like the one I just described, its not uncommon for the stock price to rise after a dividend reduction.

alex_686
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Re: What's the downside to this

Post by alex_686 » Tue Mar 24, 2020 4:45 pm

My guess is that the dividends are going to be slashed.

I would use stock options to figure out the forward implied dividends. There are spreadsheets that will help you figure this out.

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dreamrider
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Re: What's the downside to this

Post by dreamrider » Tue Mar 24, 2020 4:59 pm

WoodSpinner wrote:
Tue Mar 24, 2020 4:37 pm
OP,

Have you done any research on the company itself? It’s culture? Financials? Reserves? Unique Risks? Large Projects? Cashflow?

Do you know much about the Oil Industry? It’s competitors?

These are things I would want to know before buying their stock.

WoodSpinner
Ive done little to no research. Just looking at the stock at the 20,000 foot level. Oil already took a beating, and if the company book value is attractive, yield is high, strong reputation, why isnt everyone buying the stock? Perhaps they are, because the stock was up 22%+ today.

I mean how low can oil REALISTICALLY go? The demand is low NOW but we continue to use a heck of the stuff for the foreseeable future.

KEotSK66
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Re: What's the downside to this

Post by KEotSK66 » Tue Mar 24, 2020 5:33 pm

the 10% div yield is temporary because of the price drop but your opportunity is real

if $/share is fundamentally sustainable you're ok, you'll be roughly doubling the payout per dollar invested

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WoodSpinner
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Re: What's the downside to this

Post by WoodSpinner » Tue Mar 24, 2020 5:53 pm

dreamrider wrote:
Tue Mar 24, 2020 4:59 pm
WoodSpinner wrote:
Tue Mar 24, 2020 4:37 pm
OP,

Have you done any research on the company itself? It’s culture? Financials? Reserves? Unique Risks? Large Projects? Cashflow?

Do you know much about the Oil Industry? It’s competitors?

These are things I would want to know before buying their stock.

WoodSpinner
Ive done little to no research. Just looking at the stock at the 20,000 foot level. Oil already took a beating, and if the company book value is attractive, yield is high, strong reputation, why isnt everyone buying the stock? Perhaps they are, because the stock was up 22%+ today.

I mean how low can oil REALISTICALLY go? The demand is low NOW but we continue to use a heck of the stuff for the foreseeable future.
OP,

It’s your portfolio and your choice.

When you start investing in specific companies it’s a very different decision process than a broad based index.

Just my perspective....

WoodSpinner

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Phineas J. Whoopee
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Re: What's the downside to this

Post by Phineas J. Whoopee » Tue Mar 24, 2020 6:14 pm

We are not against dividends. We're only against misunderstandings about dividends.
PJW

CheeseheadCycler
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Re: What's the downside to this

Post by CheeseheadCycler » Tue Mar 24, 2020 6:39 pm

dreamrider wrote:
Tue Mar 24, 2020 4:59 pm
WoodSpinner wrote:
Tue Mar 24, 2020 4:37 pm
OP,

Have you done any research on the company itself? It’s culture? Financials? Reserves? Unique Risks? Large Projects? Cashflow?

Do you know much about the Oil Industry? It’s competitors?

These are things I would want to know before buying their stock.

WoodSpinner
Ive done little to no research. Just looking at the stock at the 20,000 foot level. Oil already took a beating, and if the company book value is attractive, yield is high, strong reputation, why isnt everyone buying the stock? Perhaps they are, because the stock was up 22%+ today.

I mean how low can oil REALISTICALLY go? The demand is low NOW but we continue to use a heck of the stuff for the foreseeable future.
According to some sources (eg http://www.energyintel.com/pages/eig_ar ... 80&NLID=31), the Saudis are considering dropping to less than $10 per barrel as an extreme option.

So, to answer your question. Very low.

KEotSK66
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Re: What's the downside to this

Post by KEotSK66 » Tue Mar 24, 2020 6:53 pm

buying a div at a discount, ie higher div yield, is no different than buying growth at a discount, ie higher growth yield

buying a div low is no different than buying a stock low

MotoTrojan
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Re: What's the downside to this

Post by MotoTrojan » Tue Mar 24, 2020 6:54 pm

Every quarter just before receiving your 2.5% dividend payment (on ex-dividend date), your share-price will drop by 2.5%. How is that advantageous again?

MotoTrojan
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Re: What's the downside to this

Post by MotoTrojan » Tue Mar 24, 2020 6:55 pm

KEotSK66 wrote:
Tue Mar 24, 2020 6:53 pm
buying a div at a discount, ie higher div yield, is no different than buying growth at a discount, ie higher growth yield

buying a div low is no different than buying a stock low
When you buy a stock low, you have a lower valuation and a higher expected return. When you have a higher dividend yield it just means more of your share price will be reduced (equal to the dividend) on ex-dividend; how does that change as price goes down?

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tetractys
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Re: What's the downside to this

Post by tetractys » Tue Mar 24, 2020 7:02 pm

Petroleum is going the way of the dinosaur. Chevron may adopt or not. Stay with the market.

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dreamrider
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Re: What's the downside to this

Post by dreamrider » Tue Mar 24, 2020 7:09 pm

MotoTrojan wrote:
Tue Mar 24, 2020 6:54 pm
Every quarter just before receiving your 2.5% dividend payment (on ex-dividend date), your share-price will drop by 2.5%. How is that advantageous again?
I dont quite understand. If I were to use that logic, the stock price would drop 10% every year.

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Wiggums
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Re: What's the downside to this

Post by Wiggums » Tue Mar 24, 2020 7:15 pm

I thought one of the concerns with $20 / barrel oil is that it cost of more than that to produce in the US.

MotoTrojan
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Re: What's the downside to this

Post by MotoTrojan » Tue Mar 24, 2020 7:16 pm

dreamrider wrote:
Tue Mar 24, 2020 7:09 pm
MotoTrojan wrote:
Tue Mar 24, 2020 6:54 pm
Every quarter just before receiving your 2.5% dividend payment (on ex-dividend date), your share-price will drop by 2.5%. How is that advantageous again?
I dont quite understand. If I were to use that logic, the stock price would drop 10% every year.
That’s how dividends work. Do some research on total return.

The price can still go up or down so it won’t be a -10% return year after year, but yes, the dividend right now is directly reducing the price by 10% annually. Dividends aren’t free money.

tesuzuki2002
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Re: What's the downside to this

Post by tesuzuki2002 » Tue Mar 24, 2020 7:16 pm

NotTooDeepLearning wrote:
Tue Mar 24, 2020 4:40 pm
Something crazy could happen like oil dropping to $20 a barrel when the entire company was built around $60/barrel oil. Imagine that!

:P :P :sharebeer

KEotSK66
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moto

Post by KEotSK66 » Tue Mar 24, 2020 7:58 pm

both cases you cited translate to higher yield

yield is what you get back for each dollar invested

there is a bit of disconnect though, the op asked about the div yield but he has a growth yield too

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David Jay
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Re: What's the downside to this

Post by David Jay » Tue Mar 24, 2020 8:19 pm

dreamrider wrote:
Tue Mar 24, 2020 4:24 pm
Yesterday Chevron stock had a 10% dividend yield.
Today it has an 8% yield
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averagedude
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Re: What's the downside to this

Post by averagedude » Tue Mar 24, 2020 8:39 pm

With oil at 20 something a barrel, it is more costly to produce than sell. If this continues very long, there is no doubt that the dividend will be on the chopping block. Chevron is a good company, but the industry has had negative growth rates over the last 5 years. Me personally, I would rather invest in a mediocre company in a great industry instead of a good company in a bad industry. Investing in a company because of their high dividend is usually a bad idea. I do get it though. This company is down over 50 percent and pays a great dividend. Me personally, I would stick with index investing. Markets are pretty efficient, and they have this stock priced cheap for a reason. I do acknowlege that if Russia and Saudi Arabia comes to an agreement, this stock will appreciate 20% fairly quickly. Markets hate uncertainty, which is one of the reasons why this stock is cheap. I really don't know, just what my cloudy crystal ball is saying.

KEotSK66
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Re: What's the downside to this

Post by KEotSK66 » Tue Mar 24, 2020 9:29 pm

we'll see the inefficiency in the stock market soon, as if the 33% loss isn't enough of an indicator
Last edited by KEotSK66 on Tue Mar 24, 2020 9:50 pm, edited 2 times in total.

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JoMoney
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Re: What's the downside to this

Post by JoMoney » Tue Mar 24, 2020 9:37 pm

The downside is the dividend gets cut and you possibly lose your principal investment as well. The oil industry has had a particularly tough time in recent years even before this crisis.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Phineas J. Whoopee
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Re: What's the downside to this

Post by Phineas J. Whoopee » Tue Mar 24, 2020 9:45 pm

tetractys wrote:
Tue Mar 24, 2020 7:02 pm
Petroleum is going the way of the dinosaur. Chevron may adopt or not. Stay with the market.
Humor! Ar, Ar.

PJW

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White Coat Investor
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Re: What's the downside to this

Post by White Coat Investor » Tue Mar 24, 2020 9:51 pm

jebmke wrote:
Tue Mar 24, 2020 4:26 pm
they could cut the dividend
Exactly. Or the price drops further. What good is a 10% dividend if the stock price drops 10%? It just costs you taxes without any gains.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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ThereAreNoGurus
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Re: What's the downside to this

Post by ThereAreNoGurus » Tue Mar 24, 2020 9:57 pm

dreamrider wrote:
Tue Mar 24, 2020 7:09 pm
MotoTrojan wrote:
Tue Mar 24, 2020 6:54 pm
Every quarter just before receiving your 2.5% dividend payment (on ex-dividend date), your share-price will drop by 2.5%. How is that advantageous again?
I dont quite understand. If I were to use that logic, the stock price would drop 10% every year.
You clearly do not understand how dividends work. They are not the same as an interest payment.

"When a dividend is paid, the share value of the stock or fund drops by the amount of the dividend." Of course it can fluctuate from there. (See: https://investor.vanguard.com/investing ... g-dividend )
Trade the news and you will lose.

KEotSK66
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Re: What's the downside to this

Post by KEotSK66 » Tue Mar 24, 2020 10:34 pm

:sharebeer to therearenogurus

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whodidntante
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Re: What's the downside to this

Post by whodidntante » Tue Mar 24, 2020 10:51 pm

Do you believe Chevron will beat the market over a certain timeframe, or do you believe that oil is anomalously low and will go up on a certain timeframe? If you're betting on the price of oil, get direct exposure to the price of oil. I did, or I had recently. I sold it during the nice little recent bump. I'll buy again if the price of oil craters again.

Specifically, I bought and have since sold these contracts:
https://www.cmegroup.com/trading/energy ... tures.html

Standard disclaimer: these are futures contracts and you'll shoot your eye out.

I was prepared to hold and roll the contracts through a wicked slump. Oil could easily go < $20 once storage fills up, which could happen in April. I just don't see it staying there for years, however, so I would be fine with staring at a really deep loss for some months.

I have zero confidence in Chevron's ability to beat the market long-term.

TheLaughingCow
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Re: What's the downside to this

Post by TheLaughingCow » Tue Mar 24, 2020 10:55 pm

dreamrider wrote:
Tue Mar 24, 2020 4:59 pm
WoodSpinner wrote:
Tue Mar 24, 2020 4:37 pm
OP,

Have you done any research on the company itself? It’s culture? Financials? Reserves? Unique Risks? Large Projects? Cashflow?

Do you know much about the Oil Industry? It’s competitors?

These are things I would want to know before buying their stock.

WoodSpinner
Ive done little to no research. Just looking at the stock at the 20,000 foot level. Oil already took a beating, and if the company book value is attractive, yield is high, strong reputation, why isnt everyone buying the stock? Perhaps they are, because the stock was up 22%+ today.

I mean how low can oil REALISTICALLY go? The demand is low NOW but we continue to use a heck of the stuff for the foreseeable future.

Book value for an oil company is notoriously unreliable. If you're going for a value approach, I recommend valuing them off their future cash flows.

Worst case scenario is that the company is unable to honor its debts and goes bankrupt. Shareholders are wiped out and bondholders get less than par.

KEotSK66
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Re: What's the downside to this

Post by KEotSK66 » Tue Mar 24, 2020 11:19 pm

i could care less about my portfolio's performance relative to the market, in spades after i retire

DonIce
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Re: What's the downside to this

Post by DonIce » Tue Mar 24, 2020 11:33 pm

If airlines and travel take a longer than expected time to recover, oil may stay cheap into next year. Meanwhile, electric vehicle adoption is growing rapidly. Chevron might never recover and may cut its dividend substantially. That's the risk and potential downside.

Or it could go back up in a few months and your bet could pay off handsomely. That's the potential upside.

But why bet on one company just because it has gone down 60%? The entire market was down 36% and is a much safer bet. I would much rather buy 2x the dollar amount of total market that was 30% down rather than 1 company that was 60% down.

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JulianMatthew
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Re: What's the downside to this

Post by JulianMatthew » Tue Mar 24, 2020 11:36 pm

dreamrider wrote:
Tue Mar 24, 2020 7:09 pm
MotoTrojan wrote:
Tue Mar 24, 2020 6:54 pm
Every quarter just before receiving your 2.5% dividend payment (on ex-dividend date), your share-price will drop by 2.5%. How is that advantageous again?
I dont quite understand. If I were to use that logic, the stock price would drop 10% every year.
MotoTrojan is correct. A 10% yield would mean that the stock price, all else being equal, would drop by 10% every year. Since the price would be subject to the usual noise of the market, company news, changes in investor expectations, etc. you wouldn't always be able to clearly see it on a chart, but rest assured that drop is happening.

I used to be a stubborn dividend growth investor many years ago, so I can understand why this is surprising to you. A simplified way to think about it is: if the price didn't drop by 10% every year, then "clever" investors could hop in, grab the 10% dividend, and hop out. Infinite money stream! Obviously that is non-sensical.

To your original question of "What's the downside?", there are several but I'll name two. One, you're taking on uncompensated risk for buying an individual stock. And two, if you're buying CVX in a taxable account, you're subjecting 10% of your return to a taxable event, whereas had you picked a non-dividend paying stock, you could continue to defer taxes.

KEotSK66
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Re: What's the downside to this

Post by KEotSK66 » Wed Mar 25, 2020 12:56 am

some people prefer part of their tr in the form of of a payout vs it all being in the price/nav

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whodidntante
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Re: What's the downside to this

Post by whodidntante » Wed Mar 25, 2020 9:46 am

dreamrider wrote:
Tue Mar 24, 2020 4:59 pm
I mean how low can oil REALISTICALLY go? The demand is low NOW but we continue to use a heck of the stuff for the foreseeable future.
I believe the price of oil could go negative, though I do not expect that. If storage runs out, demand remains low, and production remains high, oil will temporarily become a liability instead of an asset. If this persists very long, the fallout will be tremendous.

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WoodSpinner
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Re: What's the downside to this

Post by WoodSpinner » Wed Mar 25, 2020 10:51 am

OP,

So you have had lots of opinions expressed. Would be interested to know what you decide to do.

WoodSpinner

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dreamrider
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Re: What's the downside to this

Post by dreamrider » Wed Mar 25, 2020 11:15 am

WoodSpinner wrote:
Wed Mar 25, 2020 10:51 am
OP,

So you have had lots of opinions expressed. Would be interested to know what you decide to do.

WoodSpinner
The opportunity to buy Chevron passed due to the recent gains.

My interest in buying Chevron came after reading an article on Warren Buffett. I started wondering why he doesnt like to buy the index. He also hates Bonds too. Both vehicles are the cornerstone of Boglehead investing strategy! Then I read that Buffett doubled his investment in coke every 2 years from its dividends. Yet, the folks in this thread makes dividends sound like the shateholder doesnt really gain anything, due to the reduction of the stock price being reduced in the form of the dividends payout. I suspect Buffett bought Coke at a very good price, and/or the dividends payout kept rising over time. So, when I saw the price of Chevron and its dividend yield, it just seem like an opportunity to buy it. I wanted to find a diamond the rough so to speak.

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WoodSpinner
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Re: What's the downside to this

Post by WoodSpinner » Wed Mar 25, 2020 11:25 am

OP,

It still may be a viable plan but it’s the research and understanding that will help you shift the odds from luck to skill.

WoodSpinner

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Third Son
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Re: What's the downside to this

Post by Third Son » Wed Mar 25, 2020 11:33 am

dreamrider wrote:
Tue Mar 24, 2020 4:24 pm
....... I'm betting the stock dividends payment will outweigh the stock price risk.

What's the downside to owning this stock and getting a 10% dividend every year in this scenario?
Betting ain't what we do here....
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Phineas J. Whoopee
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Re: What's the downside to this

Post by Phineas J. Whoopee » Wed Mar 25, 2020 5:48 pm

KEotSK66 wrote:
Wed Mar 25, 2020 12:56 am
some people prefer part of their tr in the form of of a payout vs it all being in the price/nav
Dividends are a very important part of total return. They just aren't more important than any other part.

We are not against dividends. We're only against misunderstandings about dividends.

PJW

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Phineas J. Whoopee
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Re: moto

Post by Phineas J. Whoopee » Wed Mar 25, 2020 5:51 pm

KEotSK66 wrote:
Tue Mar 24, 2020 7:58 pm
...
yield is what you get back for each dollar invested
...
Well, actually, when the press writes about stock dividend yields it isn't relative to how much one originally invested. It's relative to the most recent share price. The prices fluctuate on the market. Even a constant dollar amount of dividends will be reported as a different yield at different times.

PJW

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