No Replacement For Common Sense

The hottest investment strategy is to buy stocks with high dividends. This strategy makes a lot more sense than other strategies that investors embraced in the past like buying Munder Net Net Net. But a dose of common sense needs to be used with this strategy as well.

For instance Eli Lilly pays the highest dividend in the large cap pharma/biotech space. But when looking under the hood it is also the most expensive stock in that space. By 2014 Eli Lilly's earnings are expected to fall to under $3 as patents expire, meaning Eli Lilly trades at 12 times 2014 earnings. Most large cap pharma/ biotech stocks trade well into the single digit multiples of 2014 earnings. Most trade under 7 times. Its possible that Eli Lilly will discover new drugs and those earnings will go up, but the same holds true for the rest of the companies.

I suspect the stock has outperformed because these dividend strategies have grown in popularity and Eli Lilly's dividend is among the highest of S&P 500 companies. I believe it is better to own stocks that pay less or no dividends that are a lot cheaper like Gilead, Amgen or even Pfizer.

1 comment:

PJ said...

Yes, same phenomenon is helping the REITs.