Market Timing vs. Dividend Income Strategies

Over the years I have observed that there are many ways to earn a good return in the market. In addition to buy and hold, some have successfully used various forms of market timing including sector rotation, momentum investing, technical analysis, et. al. Given a person’s unique makeup, not all strategies will work for everyone. At the same time, I believe all strategies will fail if the investor is not committed to their selected strategy over the long term.

Recently, Kiplinger published an article looking at a successful market timer and contrasting it with a buy and hold strategy. Below are some key bullets from the article:

• Bob Parrish lost 70% of his retirement savings based on advice from a financial adviser
• Parrish fired his financial adviser and decided to try timing the market
• Parrish did quite well; his portfolio has gained an annualized 23%
• Market timing is a tough strategy and few do it well. Parrish admits, “I’m savvy enough to recognize I’ve been very fortunate and that it’s not going to last.”
• Mark Matson, a Cincinnati money manager, likens a market-timing strategy “playing Russian roulette”
• Successful market timing requires three key ingredients: a reliable signal, the ability to interpret the signal correctly and the discipline to act on it.
• Once you get into market timing, it changes from an investing game to an emotional game
• The Hulbert Financial Digest has tracked the performance of investing newsletters for almost 30 years. It identified only about two dozen portfolios that have beaten the market over the past 15 years.

As I mentioned above, not all personalities are suited for each type of investing. It could be financially deadly for a compulsive personality to engage in day-trading. At some point the line is crossed between investing and gambling. Like the compulsive gambler, a compulsive day-trader could go broke trying to “win” back their losses.

Buy And Hold Dividend Stocks

Personally, I prefer an investing strategy that requires less daily attention. As a long-term, value-based, dividend income investor, daily market gyrations are just irrelevant noise in the system. Below are five dividend stocks you can buy, hold and sleep at night:

• Abbott Laboratories (ABT) – Yield: 3.55% – Analysis
• Emerson Electric Co. (EMR) – Yield: 3.78% – Analysis
• Johnson & Johnson (JNJ) – Yield: 3.27% – Analysis
• 3M Co. (MMM) – Yield: 3.20% – Analysis
• United Technologies Corp. (UTX) – Yield: 2.80% – Analysis

Ultimately, each investor must define what works best for him or her, and have the conviction to stick with it during the good times and the bad. Often the good times are preceded with some very dark days, and if you quit too soon you might just miss the good time.

Full Disclosure: Long ABT, EMR, JNJ, MMM, UTX. See a list of all my income holdings here.

Comments

[BioBoy:]

I fail to see how holding those stocks allows you to sleep at night. Those yields might keep up with inflation, but will generally be matched by the safer, more stable CD. "Daily market gyrations" might just be noise, but when you have multi-year gyrations of +/- 30%, a decades worth of dividend gains might be wiped out in a month. Dividend investing is certainly easy and requires little attention, but in reality it is a crap shoot just like all buy-and-hold investing. (Works great if you bought in 1945 and held for the next 60 years... otherwise, not so much.)

Jul 29 07:52 AM

[chap08:]

These are false alternatives.

IMO the first thing that any investor should do is decide on an appropriate asset allocation strategy. If you have a good asset allocation strategy, it will already have built in to it, both an element of market timing and a portion of value stocks. Effective market timing does not require "daily attention".

The words above that really ring true to me are: "not all personalities are suited for each type of investing" and "all strategies will fail if the investor is not committed to their selected strategy over the long term".

Jul 29 08:12 AM

[tedster98:]

buying any health care stock is suicide under the current communist administration.

Jul 29 09:07 AM

[YoYoMama:]

I'm not a market timer, but I believe it pays to watch the technicals of your holdings, regardless of what strategy you are employing.

It is not a sin to sell your dividend stock for profit (or take a stop loss) if the technicals point to an extended period of depreciation.

It is also not a virtue to buy a dividend stock based only on fundamentals, ignoring that it may be on a 52-week high, or is overbought, or giving other technical signals that it may decline.

Watching the appreciation potential of any particular stock is the insurance policy that protects against the unexpected cut or reduction in dividend. If you need to sell, all the better that you can sell at a profit, rather than lose capital.

Jul 29 09:27 AM

[notsosmart:]

careful here.now that ponzi/casino wall st cant push phony ratedAAA worthless paper they tout "trading" & say buy & hold is dead. buying a good div.paying co & joining their drip plan worked great for me.low fees & $ averaging made my retirement.if you have time on your side this is the way to go.dont be fooled.nobody has your interest as a priority.think for yourself & handle your own money.last year i had a 7.2 % yield that helped my meager social security.avoid all fees & interest if you can.

Jul 29 11:11 AM

[TheHague:]

I have not been at this very long. However, one thing is clear and that is I have traded away more profit than I have made! Buy and hold appears to be my best way to go. However, I do trade part of my holdings if I see (technical analysis) I can make some money short term. I quit my speculating. I do day trade on occasion. Buy 50 shares of PG just before Dividend Ex date. Get my dividend and then when it has risen to a desired profit I sell say half of the new shares and hold the balance. Then I look for more situations in my portfolio for the same situations. You can not do this with penny stocks or non dividend payers. The problem is the stock could fall in price more than the expected dividend payment! One has to choose a good company that will eventually head up again and wait until your loss is neutralized! This is a different take on buy and hold but so far has allowed me to grow my dividend payers while trading them in the short term and take some profit. I am sure experienced traders will cringe at this strategy, but It is but one tool I use to build profit. As with any investment strategy loss is an ever present danger!

Jul 29 12:04 PM

[Lightway:]

That's only if you take into account just initial yields. Most of the dividend investors here go after companies that have a track record of continuously raising their dividends year after year.

Look at D4L's explanation of Yield on Cost here, he shows how a Royal Bank of Canada share purchase in 1997 would have initially yielded 3.3%, yet that same share 10 years later has a Yield on Cost of 14.8%.

That's why initial yield is important, but identifying companies with a strong trend of raising their dividend is even more important.

www.dividends4life.com...

On Jul 29 07:52 AM BioBoy wrote:

> I fail to see how holding those stocks allows you to sleep at night.
> Those yields might keep up with inflation, but will generally be
> matched by the safer, more stable CD. "Daily market gyrations" might
> just be noise, but when you have multi-year gyrations of +/- 30%,
> a decades worth of dividend gains might be wiped out in a month.
> Dividend investing is certainly easy and requires little attention,
> but in reality it is a crap shoot just like all buy-and-hold investing.
> (Works great if you bought in 1945 and held for the next 60 years...
> otherwise, not so much.)

Jul 29 01:20 PM

[Lightway:]

Good point, and most of the dividend investors here also pay attention to both technicals and fundamentals when deciding to reinvest dividends into stocks, by selectively purchasing stocks that are undervalued, and shying away from stocks that are overvalued.

Dividends Growth Investor discusses reinvesting dividends in companies with attractive valuations:

seekingalpha.com/artic...

On Jul 29 09:27 AM YoYoMama wrote:

> I'm not a market timer, but I believe it pays to watch the technicals
> of your holdings, regardless of what strategy you are employing.
>
>
> It is not a sin to sell your dividend stock for profit (or take a
> stop loss) if the technicals point to an extended period of depreciation.
>
>
> It is also not a virtue to buy a dividend stock based only on fundamentals,
> ignoring that it may be on a 52-week high, or is overbought, or giving
> other technical signals that it may decline.
>
> Watching the appreciation potential of any particular stock is the
> insurance policy that protects against the unexpected cut or reduction
> in dividend. If you need to sell, all the better that you can sell
> at a profit, rather than lose capital.

Jul 29 01:24 PM

[Leif Peterson:]

Good article. As you know, however, there are other stocks with 2 to 3 times the yield, whose earnings are continually growing. Here's a gift to the new dividend investor: Kinder Morgan (KMP) a natural gas pipeline MLP, which has a continual yield of 8% and has done very well over the last year. Altria(MO) and Phillip-Morris (PM) (if you have no problem owning tobacco stock) have always done well, but can be at huge risk for law suits. The other basics to a depression-proof dividend portfolio are Pfizer(PFE), Procter & Gamble(PG), McDonalds(MCD), Duke Energy(DUK), Con Edison(ED), AXA (huge French insurance conglomerate), YUM Brand Foods (YUM, Taco Bell, Pizza Hut, KFC especially in China), and Diagio (symbol DEO, produces Smirnoff vodka, Johnnie Walker Scotch whiskies, Captain Morgan rum, Baileys Original Irish Cream liqueur, JeB scotch whisky, Tanqueray gin, Guinness stout, Jose Cuervo) are not bad. Coca Cola (KOF) in Latin America always does well. Dont' forget General Mills (GIS) which did very well through Sept-Oct last year. Last, big oil, like Exxon Mobil (XOM) and Chevron (CXZ) are portfolio musts.

A lot of the above listed stocks have 2-3% yields which is low. If you do some homework or join some dividend services, you can find depression-proof stock with 8-12% yields.

The basic requirements for a depression dividend stock portfolio right now are:

1. Continually increased earnings through the Sept-Oct crash last year and over Q1, Q2 this year.

2. Low risk for reducing dividend.

3. Greater than 500 million USD (or >1b) in market capitalization.

4. Either a pharmaceutical, big oil, or big consumer staple.

Jul 30 12:39 AM

[cap3may:]

You are wrong here!!
Buying health care and pharmaceuticals are a plus in this admin.

Look at UNH just in this one month alone. When Obamas plan passes, this stock will skyrocket.


On Jul 29 09:07 AM tedster98 wrote:

> buying any health care stock is suicide under the current communist
> administration.

Jul 30 03:20 PM

[lbator:]

I began investing in October of 2008. Prior to doing so, the words DOW and S&P 500 were terms I had to educate myself on. I began with no knoweldge of the markets, investing, or how the markets work. Since I was loosing so much money in my 401 I set out to learn all I could. I decided there was no better time to invest than the present. I am currently looking at a 28% return since October of 2008. I purchase stocks that have long term appeal but do not hold simply becasue that is the reason I bought them. Volitility has been my friend. I work in a behavioral field and have been fortunate enough to understand impulsivity. Impulse moves in the market have been the norm for some time. The stronger the market gets and the lessoning volitility means my picks will become increasingly harder. The more the market improves the less confident I am of my investments. I realize I was lucky enough to enter at the best of times, and as for now it has rewarded me. I'm also aware that I've had some beginers luck. Once the market starts peaking again and the momentum swings up I'm bailing out and will consider myself lucky

Jul 30 06:28 PM

[Be Rational:]

Yoyomama:

"It is not a sin to sell your dividend stock for profit (or take a stop loss) if the technicals point to an extended period of depreciation.

It is also not a virtue to buy a dividend stock based only on fundamentals, ignoring that it may be on a 52-week high, or is overbought, or giving other technical signals that it may decline."

I am not sure "technicals" give you a long term view of the stock. Sure, in the short term you could buy a stock on a dip and get a slightly higher initial yield, but I don't believe you can predict "extended periods of depreciation" using technicals. Also, highs and lows are backward looking measures - a 52 week high isn't a 52 week high if the stock goes up the next day. As an exercise, try pinning down a good entry point for STD (Banco Santander) since March 2009 (ignore the ex-dividend fall - that's an assignable cause).

Plus, the ups and downs predicted using technicals may not be significant enough depending on your time frame. For example, I am long on EPD - as such, it doesn't matter whether I buy it for $28.00 (today's close) or $29.25 (yesterday's close), if I intend to sell it over the next three years, it's not going to matter much. Sure watch out for those "fear rallies" and other obvious signs of exuberance, but it doesn't make sense to kill oneself over rather small ups and downs. I am not completely discounting your theory, but the returns may not be significant enough to justify the efforts you put in getting them.

Plus, technicals can be highly deceptive in volatile times such as this.

You don't have to aim for the best return or the best yield - even good returns and yields are fine over the long term.

Jul 30 07:06 PM

[David Van K...:]

I'm not sure that a false choice has not been presented: buy-and-hold vs. trading. I know that's the way a lot of people look at it, but I think a more valid way is to step back first and identify your strategy for making money with stocks. (The buy-and-hold vs. trading dichotomy does not involve strategy...they are techniques.)

I've come to believe that the two basic goals and strategies that define the spectrum for making money through stock investment are capital appreciation and dividends. Once you decide which goal is yours (and there's no reason you can't do both), the techniques for executing the strategies come into focus.

For capital appreciation, the obvious technique is buy low and sell high. What you buy can vary greatly: stocks, options, futures, short sales, ETFs, etc. Your tools can involve fundamental analysis, technical analysis, trend-following (a form of technical analysis), "value" or "growth" investing, and more. Because of the focus on price, the capital-appreciation strategy will usually lead to more trading. Indeed, at the extreme it can become day trading. But the purpose of all the activity is the same: buy low and sell high.

The second strategy, making money through dividends, leads to different techniques. It's really a different paradigm. At the extreme, the dividend investor doesn't care about the varying prices of his/her stocks. Instead, the stocks are seen as "cash machines" that churn out income. Analysis focuses on the ability and liklihood of a company to pay out a stream of increasing dividends year after year. As long as this stream of increasing dividends continues, there is little reason to sell the stock...which leads to less interest in the price of the moment. Investors still in the accumulation stage of their lives will probably want to re-invest the dividends (although not always in the same company that issued them). Investors in the harvesting stage may just use their dividends as income. The dividend investor's decisions on initial purchases will be based on initial yield, likely annual dividend growth, and the sustainability of the dividend. Whatever the tools, all the activity is focused on one goal: generating a stream of ever-increasing dividends.

Jul 30 08:13 PM

[danS:]

Typically dividend paying stocks raise their dividends about 7% a year. An income strategy for this stock is to live off the dividend (typically 3%) and sell only an amount of stock each year so that your dividend return increases with inflation. If inflation is 3% and the dividend increases 7% a year one can sell about 4% of your stock each year. Obviously if you need all of the "principle" in your investment in the near future then you are much much better in bonds.

If you view this recession as a once in a lifetime or once in a 30 year event you might want to add stocks like GE and DOW to a dividend portfolio. They are currently paying a 3% dividend but once the recession is over their dividends will most likely double very quickly as their profitability improves.


On Jul 29 07:52 AM BioBoy wrote:

> I fail to see how holding those stocks allows you to sleep at night.
> Those yields might keep up with inflation, but will generally be
> matched by the safer, more stable CD. "Daily market gyrations" might
> just be noise, but when you have multi-year gyrations of +/- 30%,
> a decades worth of dividend gains might be wiped out in a month.
> Dividend investing is certainly easy and requires little attention,
> but in reality it is a crap shoot just like all buy-and-hold investing.
> (Works great if you bought in 1945 and held for the next 60 years...
> otherwise, not so much.)

Jul 31 11:00 AM