Are Blue-Chip, Dividend-Paying Stocks Really ‘Safe’?

Big names can feel reassuring, but these companies aren't immune to stock market downturns ... due to outside forces or of their own making. From GE to Hershey, here are four big names that illustrate the point.

By Craig Kirsner, Investment Adviser Representative

published 4 September 2018

in Features

(Image credit: OlegGr)

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

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

What is a blue-chip stock?

In order to be considered a blue-chip stock, a company typically 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.

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

So, why shouldn’t all of these top global companies be considered rock-solid investments? The following are four examples of why even well-known companies aren’t always worth the investment.

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 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 (GE). 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. And GE wasn’t the only company that took a hit. All together 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 troubles. This massive company, a historic highflier in the market, has been plagued by debt, much of it from underfunded 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 (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 U.S. 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 (HSY) wouldn’t be able to make the vast majority of its food items. And when cocoa prices increased from $2,000 to more than $3,000 per metric ton in 2015, this hurt Hershey significantly.

Cocoa prices dropped to less than $2,000 in 2016, but then they went 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, Hershey 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.

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Lack of innovation

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

From 2013 to 2017, P&G’s yearly earnings dropped nearly 20%. P&G has been slower 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 $68.32 on Sept. 10, 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.

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Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Stuart Estate Planning Wealth Advisors are 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

Disclaimer

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Craig Kirsner, MBA, is a nationally recognized author, speaker and retirement planner, whom you may have seen on Kiplinger, Fidelity.com, Nasdaq.com, AT&T, Yahoo Finance, MSN Money, CBS, ABC, NBC, FOX, and many other places. He is an Investment Adviser Representative who has passed the Series 63 and 65 securities exams and has been a licensed insurance agent for 25 years.