What I've Learned From 10 Years Of Dividend Investing

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 |  Includes: BP, KO, MCD, V, WBK, WU
by: Integrator

My dividend investing journey has been ongoing for more than 10 years and has had more than the occasional change of direction.

From an exploration of high-yield stocks to international dividend-paying stocks and even small- to mid-cap dividend stocks, I have tried a number of ways to grow a high-quality dividend income stream.

I've learned a lot during that time and I'm sure I'll learn much more as I continue to drive my investment strategy around dividend growth and dividend income.

Here are my key takeaways from my dividend journey so far:

Wide Moat stocks with strong track records shouldn't be sold

In my opinion, a dividend investor should focus on buying and holding top drawer, high-quality dividend stocks with defensible competitive advantages. Once bought, these should be held forever.

It's difficult to beat the peace of mind and the consistency of earnings and dividend quality that these stocks provide through a range of economic cycles.

I place McDonald's (NYSE:MCD) and Coca-Cola (NYSE:KO) as two stocks in the high-quality category. Consider the revenue growth for both companies over the last 10 years. Both have recorded consistent year-on-year increases over the last decade, with only a slight dip in revenue (approximately 3%) during the 2008-2009 recession.

With such consistency of revenue and earnings, it's no surprise that both have performed strongly over time. Investors who invested $10,000 in McDonald's stock 20 years ago and reinvested dividends would have an investment value of close to $111,000. An investor who invested $10,000 in Coca-Cola 20 years ago and reinvested dividends would also have been handsomely rewarded, with close to a $55,000 investment today.

To see the enduring quality of these businesses you only need to go further back in time. An investor who invested $10,000 in Coca-Cola in 1970 and reinvested dividends would have an investment value of close to $1.8M today, while a similar investment in Mcdonald's would be worth close to $6m.

With such strong total returns over the years, the temptation frequently arises to sell these types of stocks on strong performance. I have fallen into exactly this trap with both McDonald's and Coca-Cola stock over the years.

In 2009, I picked up both McDonald's and Coca-Cola stock at what looks like bargain basement prices in hindsight. Unfortunately I sold both of these for some handy profits in 2010, only to see the stocks continue to skyrocket in price. I have since bought back into McDonald's and more recently Coca-Cola, but at much higher prices.

You get very few opportunities to acquire high-quality dividend payers at reasonable prices, and these stocks tend to appreciate over time. So buying and holding these stocks should not only provide strong total returns but also the peace of mind to allow one to be a contented investor and experience consistent increases in dividend income.

Patience pays

Mr Market often provides opportunities for patient dividend investors to pick up quality dividend stocks at discount prices. This is the one thing I've consistently observed through many years. Whether it's missed earnings or concerns about the economy, wide moat, dividend-paying stocks are put on sale every once in a while.

During the course of 2002, McDonald's had a series of missed earnings, which caused the stock price to plummet. Nothing was broken with the franchise or the business model, but management guidance was poor. Investors who were lucky enough to jump into McDonald's stock at that time would have seen close to a 500% return on their investment since then.

Coca-Cola itself wasn't immune from a crisis of confidence during the late 1990s. The company experienced a sharp earnings decline in 1998 as well as missed estimates. While the stock price declined for much of that period, investors who stuck it out are still well ahead.

I will never forget the crash in the stock price of American Express (NYSE:AXP) during 2008-2009. Investors were concerned that banks wouldn't lend to each other anymore and that people wouldn't use debt again. I was able to get American Express for a bargain basement $12 a share at close to a yield of almost 6%. Needless to say, the stock is now up more than 6 times the price at that time.

I believe we are seeing similar opportunities today with both BP and Western Union (NYSE:WU). With BP stock depressed by concerns over liability stemming from the Gulf of Mexico debacle several years ago, investors have the opportunity to pick up stock in a dividend payer offering a yield of close to 5%, which will keep paying and growing dividends well into the future.

Similarly, Western Union stock has been depressed as a result of concerns in the Mexico money transfer market and generally weak growth over the last few years. Long-term dynamics for money transfer and Western Union's own strong competitive position remain favorable for future investment success and continued dividend income.

Building a dividend income stream takes time and discipline

Dividend stocks won't get you a large income stream overnight. It has taken me 10 years to get to a $25k/yr dividend income even with consistent, regular allocations of capital and periodic reinvestment of dividends.

Disruptions and life changes can get in the way of a regular investment plan to keep investing capital. There have been times that I have thought about selling out some dividend positions for various reasons, but I've managed to be able to plan around my dividend investment strategy to realize other needs.

In my view, you really start to see the effects of accelerated compounding with each year that passes, which helps provide further motivation to stick with the strategy. Growth of 7-10% a year in dividend income on a $25k dividend income base starts to result in meaningful increases in annual income over time.

Reinvestment of dividends can accelerate income

I automatically reinvested my dividends when I first started dividend investing. It was a great way to keep regular contributions into dividend stocks even when I didn't have a lot of extra income. However I realized as my dividend income increased that I could be much more strategic with respect to how I deployed my money for reinvestment.

I concluded I would be better served directing my income to high-quality stocks that were beaten down for reinvestment of dividends, rather than just making automatic reallocations of dividends.

Dividend reinvestment is a powerful tool to grow a dividend stream. An investor who invested $10k into McDonald's stock 10 years ago and actually reinvested their dividends would have almost $700 extra in annual dividend income today than an investor who didn't reinvest their dividends.

International stocks add a buffer to your dividend income

I have been looking beyond the U.S. market for dividends for a number of years. In addition to providing currency diversification, yields in international markets can be higher and also provide valuable diversity during the inevitable troughs in the economic cycle.

U.S. banks such as Citi (NYSE:C) and Bank of America (NYSE:BAC) made deep cuts to dividends during 2008-2009. These are still quite some way from being fully restored.

In contrast, Australian banks such as Westpac (NYSE:WBK) actively grew their dividends after the downturn in 2009. In fact dividends in Australian banks are now much higher than what they were prior to 2008-2009, while many of the U.S. bank dividends are still at very low levels.

Lower yielding dividend stocks can provide significant total return

While my core portfolio consists primarily of higher-yielding dividend-paying stocks with wide moats, I do maintain space for some low-yielding, faster-growing dividend stocks, which I expect will provide significant dividend growth over a long period of time. Visa (NYSE:V) is one such stock that I hold in my portfolio. The company is riding the wave of consumers moving from cash to plastic.

Of course, this trend is not new, but it is something that will only accelerate in developing economies over the coming years and provide the next wave of growth for companies like Visa. While Visa's dividend yield of less than 1% is fairly low, I expect that it should be able to provide significant dividend growth over many years.

Since listing in 2008, Visa stock has almost tripled in price, with dividends having more than doubled during this period.

While low-yielding, fast-growing stocks do not need to be a material part of one's portfolio, having some of these stocks can provide strong total return and contribute to long-term dividend growth.

Disclosure: I am long WU, BP, MCD, KO, V, WBK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.