Are Blue-Chip, Dividend-Paying Stocks Really “Safe?”

4 examples of why even well-known companies aren’t always worth the investment

For many investors – newbies and veterans alike – there is often an attraction to big corporations. If a company is a household name (and you perhaps even have some of their products in your house), this appears to be a safe investment.

And because many of these blue-chip stocks pay dividends, this seems like a win-win situation, especially for retired investors who depend on income. But, as recent history shows, this isn’t always the best idea.

What is a blue-chip stock exactly?

In order to be considered a blue-chip stock, a company has to have been in business for a long time with billions in market capitalization. This type of company is typically one of the leaders in its industry.

Examples include Disney, IBM, and Coca-Cola. And, as mentioned, these companies often issue dividends to shareholders on a quarterly and sometimes annual basis.

Why shouldn’t all of these top global companies be considered rock-solid investments?

Often there’s no such thing as a good stock in a bad market

When things are going well, blue-chip stocks can seem like a stable way to realize market gains. A strong economy generally results in consumers buying from these companies, which maintains – or raises – the stock price and allows investors to keep getting their nice dividends.

But what happens when things stop going so well?

There’s a perception that these well-established corporations will stay strong even during bad markets. But this often just isn’t true.

A great example of this is General Electric. In 2008, GE’s quarterly dividend was 31 cents per share. When the worldwide recession hit, that dropped to 10 cents during 2009’s second quarter. Altogether in 2009, more than half of companies that paid dividends cut them or stopped paying them entirely.

But that wasn’t the full story on GE’s disastrous troubles. This massive company, a historic high-flyer in the market, has been plagued by debt, much of it from unfunded pension plans and a series of poor management decisions.

GE lost over $140 billion in market value in 2017 alone, causing it to be kicked out of the venerable Dow Jones Industrial Average – the index that tracks the bluest of the blue-chip companies – this year. The share price of GE has dropped by over 50% in the past year.

Poor foresight

AT&T is another example of a blue-chip stock that has struggled mightily in recent years. One reason cited for this is the company’s reliance on its pay-TV business, while more and more consumers are cutting cords.

According to the Leichtman Research Group, the US market for pay TV lost around 1.5 million video subscribers in 2017, with a third of them AT&T customers. In this year alone, the value of AT&T shares has dropped nearly 16%.

Fluctuating prices

Companies that make things often have to rely on procuring the right elements to create their products. For instance, without cocoa, Hershey wouldn’t be able to make the vast majority of its food items.  And when cocoa prices increased to more than $3,000 per metric ton in 2015, this hurt Hershey significantly.

These prices dropped to less than $2,000 in 2016, but now they are back up to $2,500. Not only are Hershey executives taken on a roller coaster ride with these fluctuating prices, so are their investors. In 2015, the stock hit a January high of $110.66 followed by a November low of $83.82 – a 24% drop. The stock recovered, but Hershey stock has taken about a 20% hit ($93.99 on July 13, 2018) from its January price this year.

Lack of innovation

Corporations can’t stand on name recognition alone, and this is evident with a company like Proctor & Gamble, maker of Tide, Crest, Charmin, and many other products.

From 2013 to 2017, P&G’s yearly earnings dropped nearly 20 percent, and one reason for this could be although they are widely used, their products aren’t typically known for their quality. Plus, P&G has been slow to innovate, still mostly relying on in-store purchases and only recently putting more of an emphasis on e-commerce.

In the past five years, the overall price of the stock has fluctuated between a high of $93.46 on Dec. 26, 2014 and a low of $68.42 on Sept. 11, 2015. That’s a swing of almost 27%.

Why diversification is the key

There is certainly nothing wrong with investing in blue-chip stocks, but you know what they say about putting all of your eggs in one basket. This is why the smartest thing investors – and particularly retired investors – can do is diversify their portfolios to include fewer volatile investments.

At Stuart Estate Planning Wealth Advisors, we can help you do this. We focus on diversification for our clients, including more diversified investments such as institutional mutual funds and ETFs and safer investments designed to protect your wealth. In addition, we utilize software to analyze portfolios and assign a risk number from 1 to 99, followed by rebalancing investments to hit your personalized Ideal Risk Number.

To learn more, come to one of our upcoming dinner workshops at Ruth’s Chris or Abe & Louie’s steakhouse in Boca Raton or Fort Lauderdale. Call 1-800-807-5558 for details or to RSVP.

Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Stuart Estate Planning Wealth Advisors have not affiliated companies. Stuart Estate Planning Wealth Advisors is an independent financial services firm that creates retirement strategies using a variety of investment and insurance products. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Any references to safety and security generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. 561609