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Value, dividend investing, growth at reasonable price, portfolio strategy
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Introduction:

For those of you who have never read one of my articles and for those who read them often, let me make one thing clear. I am a Dividend Growth Investor. I've been using this strategy since 1984 and while I like to dabble in other strategies, this is my primary focus when it comes to managing my retirement investments.

My goal has always been to create an income stream that will support me in my retirement years. That income stream is to be generated by dividend paying stocks. It has always been my intention to use dividend income to support me, leave that dividend portfolio to my wife and have it support her (along with her own dividend portfolio) and then have both those portfolios transfer to the children, thereby creating generational wealth through active estate planning.

As I approach the day of reckoning (retirement) I can finally say, mission accomplished.

What I Know:

Dividend Growth Investing is one of the most misunderstood investment strategies out there. Whenever you read an article about DGI, there is no small number of critics who want to challenge the idea of Dividend Growth Investing, but it becomes apparent very quickly, that many of these critics really don't know very much about the strategy or how it works.

That's ok. Most of the people practicing DGI didn't know how it worked before they started investing this way either. It would be advisable, however, if you are one who is not using DGI as a strategy, to take the time and learn more about DGI and determine if it's something you want to use or something that you are going to take a pass on. Every investment strategy has its strengths and weaknesses.

There are all kinds of ways to invest your money and you should never feel compelled to practice any particular strategy because someone tells you that it is the "greatest thing since sliced cheese." You may not care for cheese.

What You Should Know:

There is an author that I follow who uses the name, "Five Plus Investor." In one of her articles, she described Dividend Growth Investing this way:

Dividend Growth - This method is considered the surest path to a secure and growing dividend stream. Dividend growth stocks are primarily common stocks with a "sweet spot" yield between 2% to 4% and a dividend payout that increases at least once per year. This method is addressed often on Seeking Alpha and has many faithful adherents. For retirement purposes, this method works best when starting young and investing much, or when starting later with a large capital base. The motto of the Dividend Growth Investor is: "slow and steady wins the race."

I think that is one of the best definition that I've come across, for Dividend Growth Investing. She mentions "common stock." Not MLPs or REITs for example. She mentions a "sweet spot yield between 2% and 4%. Not chasing yields. She says it works well when starting young and investing much. And she says it works well when starting late with a large capital base. But most importantly, she says "slow and steady win the race." No chasing unicorns or trying to find the end of the rainbow. A slow and steady progress toward a specific end which is creating an annually increasing income stream to fund your retirement years is a very worthy goal.

Things Too Consider:

Finding a universe of stocks that have a history of increasing dividends on an annual basis has been made very easy, thanks to David Fish, who provides a monthly update for stocks that have increased dividends for at least 5 years running. Here is a link to that list of companies for your review.

This list, while a valuable tool, does not take the place of due diligence on your part as an investor. Just because a particular company is on this list does not make it a stock that is a value at this particular point in time.

Where things get interesting is when you have owned these companies for a period of time and you have been able to enjoy the Dividend Growth Rate that these companies produce for those who invest in them. By the same token, these particular companies also have competitive total returns over the last few years for those who are more active investors than passive in nature.

One of my earliest articles was: "10 Commandments For Dividend Growth Investors" (link to article). The advice given in that article is very appropriate, even for today's market.

I've grown a little since that first article and now I look at my investing rules a little differently. While my overall strategy is DG investing, I have to admit that many of the companies that are found on David Fish's lists are not the compelling values that they have been in the recent past. So, I've changed a bit. I've adjusted. I've grown. I've looked at how I invest and come to some new conclusions. My new guidelines are:

  1. Valuation matters. It makes little or no sense to me to invest in a company only because I have capital to invest. The company is either priced at a value or it is not. In the happenstance that a particular stock is overvalued, find something else to invest in. Sometimes, "doing nothing" is the best decision you could make.
  2. Dividends matter. When I invest, I like to invest in companies that pay a dividend. In the past, I've focused on companies that have a long history of paying and increasing dividends. Now? Some of the newer dividend payers might very well become the Dividend Champions of tomorrow. Give them a look. Keep an open mind.
  3. Dividend Growth matters. Even companies that have a recent dividend history can and should be considered in relationship to their dividend growth history regardless of the length of time that they've been paying dividend. Look at the short term history and consider the possibility of what the increased dividends can be and how that will affect your investment.
  4. Think outside of the box. Sometimes we find a situation that is a compelling value. That stock may or may not pay a dividend. It's ok. There is nothing wrong with a capital gains play as long as you treat it like a capital gains play. A recent purchase in our portfolio was Cognizant Technology (NASDAQ:CTSH). No dividend, but up 23% in price over the last 3 months. Another, Questcor Pharmaceuticals (NASDAQ:QCOR) is up 66% since we purchased it in June.. The company pays a dividend but this was a capital gains play and we added to our position yesterday at $54 because we believe the stock is a value.
  5. Fundamentals matter. When I look at a company, I want to see revenue growth and earnings growth. Now a company can have earnings growth by cutting expenses. That only gets the company so far. Sooner or later, revenues have to be increasing and that should translate into increased earnings. I can consider a company with a higher PE Ratio if the revenues and earnings are growing.
  6. Debt matters and sometimes it doesn't. There are companies that are in very capital intensive industries. All debt is not the same. Dig into the numbers a little deeper and make a conclusion as to how the debt load will impact results. A recent purchase, Tal International (NYSE:TAL) has a capital intensive business and a large debt load. Worth a look.
  7. Create a "buy zone." If we arrive at a company being a value, then it would follow that fundamentals would be in a relative relationship with that value. A stock is not a value at $80 a share and not a value at $82 a share. Determine the "buy zone" and make a purchase. Some people use puts rather than a limit order. That's not a bad way to go. I don't, but, I'm fine with it now that I've looked into it.
  8. Reinvesting dividends is a form of compounding. When I look at my own results for Colgate Palmolive (NYSE:CL) and look at the value of the stock today with dividends reinvested as opposed to them not having been reinvested, the difference is substantial. Yes, I still would have gotten he dividends, but by reinvesting I've been able to "dollar cost average" my position.
  9. Have an objective. Why are you investing in the stock market? What do you hope to accomplish by putting your money at risk? What is the end game? Do you have an exit strategy in place? What would cause you to sell a particular stock? Is that rule hard and fast or flexible. A while back, we invested in Safeway (NYSE:SWY) at $16.50 a share. We liked the dividend, but liked the value more. We have sold our position in SWY today at $32 a share which is a 93% gain in less than 12 months.
  10. Trust your instincts. After doing all of your due diligence, there comes a time where you have to make a decision one way or the other as to making a purchase or not making a purchase. You can find just as many articles that say a particular stock is a buy as you can articles that say the same stock is a sale. Reading all those opinions is probably a prudent thing to do, but in my opinion it leads to indecision. Indecision cost you money. When we purchased Western Union (NYSE:WU), Staples (NASDAQ:SPLS), CA Technology (NASDAQ:CA), Safeway , CSX Corporation (NYSE:CSX), and Norfolk Southern (NYSE:NSC) there were plenty of naysayers out there. These companies have worked out for us well and while we did not take huge positions in these stocks, we made the decision to purchase based on valuation.

Conclusion and Summary:

Know yourself. Know what your goals are. Design an investment strategy that makes sense for your goals and objectives. Before you purchase any stock, ask yourself some basic questions. Why am I making a purchase? What do I hope to accomplish? Does this stock have more risk that I'm willing to take based on my risk tolerance? Am I buying value or chasing yield?

You should be able to defend your purchase decision. Whatever that might be, it is unique to you. It may be seen as subjective or it may be seen as objective. Either way, you have to be able to have that purchase make sense in a larger picture of your own overall investment strategy.

Source: 10 Rules For Investing In Today's Stock Market