Riding on the Backs of Dinosaurs

This morning’s utterly unimaginable accounting debacle in Hewlett-Packard – on top of an already wasting business selling gray boxes that no one will ever want again – serves as a reminder that the prudent investor eschews “controversial” stocks like this one no matter what – even if they’re Dow components or hundred-year-old companies.

But there’s an even more interesting lesson here that rarely gets discussed – and that is the danger of Dividend Reinvestment Plans or DRIPs you hear advertised so often.

Dennis Dick and Joel Elconin make the quintessential argument against DRIP investing this morning with Hewlett-Packard as just the latest in an ongoing parade of once-reliable dividend payers that havcve crushed their shareholders thanks to the ongoing business model Darwinism that is Capitalism. Nothing lasts forever, and riding a dinosaur stock off into the sunset just because your dividends are being reinvested is the epitome of negligence.

Here’s the piece, posted at Dennis and Joel’s site PREMARKETINFO:

Many investment advisors advocate for the use of dividend reinvestment programs (DRIPS) in their client’s portfolios.  Some brokerage accounts actually have the setting defaulted to automatically reinvest dividends into the underlying companies when a customer opens a new account.  I believe this is a big mistake.

Take a look at the share prices of Best Buy (BBY) and Hewlett Packard (HPQ) today.  They are making new 10 year lows.  The business model of both of these companies is broken.  However, both companies have had a history of paying a nice dividend.  If an investor had been banking those dividends for the past decade, they may still be down in both positions, but they would have had a substantial amount of their initial investment recouped, just from the dividend checks.

Keep reading:

DRIPS – A Scary Tool For Investing (PREMARKETINFO)

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