Stop Not Using Stops

Jun 3rd, 2009 – Comment

The sanctity of the dividend is the foundation that supports investor confidence in a company.


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Lou Schizas is an equities analyst, investor, entrepreneur, professor and television and radio personality – and a true believer in the happiness-inspiring powers of capitalism.


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Hi: Lou,
I just read your comments to Doug. bmo3What do you think about the Bank of Montreal in light of the announcement that Moody is down grading them? Will their dividend continue?
Thanks,
Glenn

Hi Glenn,

You have focused your attention on the risks associated with buying a stock for the dividend. The sanctity of the dividend is the foundation that supports investor confidence in a company.

The dividend paid to owners of common shares is at the discretion of the the board of directors based on their determination of the best interests of the company.bmo4 The directors at a company like the Bank of Montreal, which has a long history of paying a dividend and increasing the dividend, would rather have a root canal without Novocaine than cut or suspend the dividend.

From my point of view cutting or suspending the dividend would be low on the menu of choices, however its not a guarantee that the board would not take that action if circumstances demanded that they do so. The best defense for the unforeseen? Stops.

If you own a stock and want to protect the potential downside of getting sideswiped by a turn of events that could or might  happen, put in a stop loss order with your advisor. By putting in a stop loss at a reasonable price it puts the decision to preserve capital on auto pilot.

Regarding the change in outlook for BMO by Moody’s from stable to negative and a possible cut in the rating because of exposure to the US recession and off balance sheet investment vehicles, investors didn’t seem to react negatively yesterday. In fact they bid up the stock marginally.

The chart is exhibiting some continuation patterns such as an unbroken uptrend line, the MACD turning up, and a golden cross. All indicating that there could be more to come. These again are not a guarantee ,so put a stop under your position to preserve your capital come what may.

Happy Capitalism!

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