Ignore no one which says that stock splits have no impact on your portfolio (or your dividends!).
They do absolutely set you up for a nice price hike. I have seen it time and time again. It’s easy to see why: When a company, especially a blue chip dividend producer, splits its stock, that move attracts people who waited, seeing the price before splitting as too expensive.
Let’s be honest: we’ve all done it. How many times have you avoided a stock because it is trading at $ 300? Or $ 500 (or whatever your idea of expensive)? No matter the really high level traders, such as Alphabet (NASDAQ :), at $ 2,700, or Berkshire Hathaway (NYSE 🙂, for which you have to spend more than $ 438,000 for a single class A share.
I know it stops people — I hear it from readers of my Hidden returns regularly advice on dividend growth, even though we all know that a stock’s price itself has little to do with its value. (At best, that’s half the equation: for a true sense of value, we need to stack it next to profits or, better yet, free cash flow, a more accurate measure of how much is generated. cash flow of a company.)
“Cheap” stocks: more fun, not more profitable
There are a lot of reasons people have this price lock. Some still think of stocks in “lots” – and a lot of 100 was the smallest you could buy years ago (although you can buy any number now, and even fractional shares with some. brokerage houses).
And let’s be honest, it’s just more fun to buy more stocks! Give up $ 15,000 to buy just 36 shares from a trader at $ 407 UnitedHealth Group (NYSE 🙂 just feels underwhelming about picking up, say, 272 shares from a $ 55 trader Verizon Communications (NYSE 🙂 for the same $ 15,000.
But we have to put that old bias to bed, because high-priced stocks can and do outperform: if you abstain from UNH (a potential divider today, as we’ll see in a moment) in January 2020, when ‘it traded at $ 300, you would have missed a stock that absolutely outperforms and crushes Verizon:
UNH overtakes the “cheaper” alternative (and the market)
UNH-VZ Total Yield Charts
I’m not pulling this UNH example out of the air – this is the feedback we bagged Hidden returns when we bought the stock on january 20, the ‘high’ price and everything. We did this by focusing on the soaring UNH dividend, a proven earnings predictor, as a rapidly rising dividend.
And when it comes to dividend (and stock price) growth, UNH is in a different league. Check out this graph of how UnitedHealth and Verizon stock price and dividends have performed since the depths of the last financial crisis in 2008/09. You can clearly see the UNH share price improving thanks to its strong dividend growth, while the dividend and Verizon share price move to a much lower level:
UNH dividend ignites its actions
Despite this story, the $ 300 price of UNH at the time Again makes some people stop. This is where a split can come in and unlock a stock’s value as it attracts hesitant buyers like these.
How a share share can unlock value
More information on UNH in a second. First let’s talk more about the slits, which on their surface are a wash. Management simply takes each share and divides it on a certain basis – three to one, say, or five to one. The value of your stake and your overall dividends remain the same, even if the number of shares you own multiplies.
We recently saw this happen with another of our Hidden returns farms: Canadian Pacific Railway (NYSE :), which we bought in April 2020 and subsequently gave us a quick 63% total return.
CP divided its shares by five on May 14, 2021. When markets closed on May 13, our CP shares were trading at $ 400 and when markets opened the next day, they were trading around $ 80. While that apparent 80% drop might cause a panic attack when you check your account in the morning, it doesn’t mean anything, as we’ve subsequently owned five times as many stocks.
This sets the stock well for more growth, as “price conscious” investors take notice and buy. A recent pullback in stocks, due to the company’s struggle with Canadian National Railway (NYSE 🙂 on control of Kansas City South (NYSE 🙂 also sets it up for a further hike (although we’ll hold the stock for now, until the KSU drama fully unfolds).
To see what kind of post-split gains we might be on the line for, consider what happened to the chipmaker. NVIDIA (NASDAQ :), which announced on May 21 that it would divide its shares four for one, with shareholders receiving their new shares as a stock dividend on July 19, 2021:
NVIDIA crushes NASDAQ following split announcement
It didn’t hurt that NVIDIA announced record revenue and profit on May 26, which management was sure to be aware of when it announced the stock split. (This highlights another reason companies are announcing splits: to get attention before good news.)
Stock splits are a bullish move, but beware of stock consolidations
Just as stock splits are usually the sign of a healthy business, stock consolidations are the opposite. It happens when a company’s shares drop so low that management puts them together to give them a higher price.
Example: the serial loser General Electric (NYSE 🙂, a former must-have dividend that has reduced its dividend twice in the past five years. This pushed its share price down, showing that the dividend magnet we’ve seen at work with UnitedHealth Group can work backwards when payouts are reduced:
GE’s dividend lowers its share price
In response, GE management resorted to an eight-for-one equity consolidation, which went into effect on Monday, August 2. This means that on Friday, July 30, GE stock closed at $ 12.95 and then opened for trading on Monday at $ 100.60.
But of course, nothing has changed with the sinking of GE’s business. And in fact, you might see it as management waving the white flag: Unable to increase the stock through improved earnings, they did so by simply “bundling” GE shares.
Combine splits and dividend growth for big payouts
So what’s the takeaway? While buying a spin-off (or potential spin-off) is never a good idea on its own, buying a stock with a rising dividend is a proven way to build wealth. And if you buy a potential splitter with a skyrocketing payout, you might see a nice “double hit” increase in your overall yield.
Let’s finish with a quick note on UNH, which is trading at $ 407 as of this writing, not too far from its all-time high of $ 425. It’s a sign that a split could be on the horizon. Another? History: UNH has split its shares five times in the past, the most recent being a 2: 1 split in 2005 – so you could argue it’s due.
Disclosure: Brett Owens and Michael Foster are contrarian investors looking for undervalued stocks / funds in US markets. Click here to learn how to profit from their strategies in the latest report, “7 Great Dividend Growth Stocks for a Secure Retirement. “