It’s been a rough ride for Facebook this year. In March, the Cambridge Analytica information leak caused the company lose approximately 35 billion dollars in market value. Fast forward 5 months and the stock fully recovered and went on to new heights. Unfortunately, their recent earnings call showed this was to be a short-lived victory. Facebook missed their forecasted numbers and the market punished the company by annihilating 20% (~120 billion dollars) of the company’s market value. I have no doubt that Facebook will recover but it teaches an important lesson. Owning certain types of stocks aren’t for the faint of heart.
In my post on capital appreciation vs. dividend paying stocks, I explained the differences between the investment approaches. Facebook’s ride this year reinforces why I feel dividend growth investing is the way to go for anyone thinking long term.
A Hypothetical Universe
Just for fun, let’s wave a magic wand that transports us to a parallel universe where Facebook regularly pays a dividend. In this utopia, a Facebook investor would receive a check every three months for an amount that’s based on the company’s earnings.
In this world, would a 20% drop in market price be cause for heartburn? I’d answer with a resounding “No!”. Here’s why.
The lower stock price provides the Facebook investor with the opportunity to acquire more ownership in the company when the dividend is paid. Assuming that Facebook’s fundamentals remain sound, this is a win-win scenario. If the stock price goes up, great. If it goes down, that’s good also. As a dividend growth investor, the day-to-day or month-to-month price of the stock doesn’t matter to you nearly as much as the capital appreciation investor. You’re getting paid either way.
Reality Returns
For anyone pursuing the capital appreciation route, take stock of what you’re really getting signing yourself up for. You’re playing a game where the only way you make money is if the stock price moves up. That’s a challenging way to make money over the long haul. Consider another important point. Let’s say you’ve held Facebook since it went public in May, 2012. Even if Cambridge Analytica never happens and they didn’t miss their earnings number, you didn’t realize a penny of income from owning the stock for the past 6 years.
I prefer games where the odds of winning are stacked squarely in my favor. It’s better to be the casino owner than the gambler.
A great FREE tool I personally use for tracking my portfolio is Personal Capital. When you click this link to sign up for your free account, both you and I will receive $20. Every little bit helps right?
Legal Disclaimer: The information provided and accompanying material is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney, CPA or other professional to determine what may be best for your individual needs.
