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

This morning, I decided to get up a little earlier than usual as I was really in the mood for breakfast. Normally, I get up at the last minute and sprint through the motions of getting ready for the day, before heading out the door. But, today, things were a lot more leisurely.

Once breakfast was ready, I decided to spend a little time on the computer and checked in at MoneyWatch. The first article to strike my fancy was one titled: "How Bad Will New Investors Get Hit?" (Link: here). The author of the article, Kirk Spano had some interesting observations. Here's what he said:

Mom-and-pop investors tend to be late to the party. It looks like this time will be no different, as investors are pumping money into stock mutual funds at a frantic pace this year. But at what cost?

According to TrimTabs, stock mutual-fund investors have already invested $277 billion for the year. It looks like they might break the mark set in 2000 of $324 billion.

This huge inflow is very disconcerting to me because a lot of the money is coming from middle Americans who are likely succumbing to the fear of "missing out" on market gains. This type fear, like most types of fear, is almost always a recipe for disaster.

With markets at all time highs, it is probably prudent to stop and take a look at where the markets are right now and I would suggest that perhaps erring on the side of caution here is warranted. The question that I ask here is "What's the hurry to put money into the markets now?"

What I Know:

While I count myself as a "Mom-And-Pop investor," I have given up on mutual funds quite some time ago and have been investing in individual stocks, using a Dividend Growth strategy.

With that DG strategy in mind, I can't help but remind you that there are some very important metrics to investing the DG way.

First, buying stock in companies that are priced at a value is more important than you might think. We invest in a market of stocks, not a stock market.

Second, seek out companies that have a history of increasing dividends annually. As a DG investor, the goal is to create an ever increasing dividend income. You can't really do that very effectively if companies you own, using this strategy, do not increase dividends annually.

Third, look for companies that increase their dividends at a rate that is larger than inflation. While companies like AT&T (T), Verizon (VZ) have larger yields, their Dividend Growth Rates do no meet the criteria. On the other hand, there are companies like Target, Walgreen (WAG), McDondald's (MCD), Chevron (CVX) and Coca-Cola (KO) that have DRG's in excess of inflation for 1-3-5-10 year periods of time.

Those simple metrics can help you build a better long term portfolio over time that can meet the end-game of Dividend Growth and that is the ever increasing income steam.

As a contrast to DG, when I talk to many of my cohorts at work, I find that many of them have been increasing their contributions to their 401k plans and have been changing their holdings from funds that have been underperforming to those that have been posting better returns, so far this year. When I ask them about their strategy behind making those changes, I get "Well, the other funds are 'better' because they've grown so much this year."

Like Mr. Spano, I get a little concerned with the increased focus on what appears to be a notion of "getting on board before I miss the boat" mentality. Feeling "left behind" has proven time and time again that newer investors are setting themselves up for a potentially dangerous reckoning down the road.

In my opinion, the boat is not leaving the dock and there shouldn't be any hurry to get on board. Especially if you do not have idea as to where the boat is going and what time it is fixing to leave.

What You Should Know:

Regardless of your own personal investment strategy, it should go without saying that in today's marketplace, stock valuations have become more important than ever before. Adding new money to existing positions or creating new positions should be tempered with a couple of key guidelines.

First: "Why am I investing in the stock market and what do I hope to accomplish by doing so?"

There are as many reasons to invest in the stock market as there are reasons not to invest in the market. There are people who see investing as a way to achieving wealth. There are some who are wanting to be able to fund college for their children. Some might be wanting to amass enough money for "that trip of a lifetime." Others, are looking to build an income stream to support themselves in retirement.

Your reason is as personal to you as you want it to be. There is no right reason or wrong reason to invest in the market. But, I think it would serve you well to at least have a reason. Some call it a goal. Some call it an end-game. But you should be able to answer why you are putting your money at risk.

For me, investing has been largely an exercise in creating wealth and creating an income stream. My own retirement portfolio is made up of companies that I have owned for some time. The main objective with the portfolio that I own is to have income grow annually at a rate that is greater than inflation.

While I have achieved that goal, many investors have not. But instead of blindly going forth into the markets, perhaps there are other things to consider, before taking that leap.

In my children's portfolio, the Portfolio For Do It Yourselfers, our goals are twofold. First, to generate income for additional stock purchases and second to generate capital gains to do likewise. It is a portfolio that should appeal to both DGI investors and Growth Investors as it is a hybrid of sorts.

In a recent article about this portfolio, we highlighted 11 companies that were on our radar. Those companies were a combination of dividend stocks and growth stocks. They were, Caterpillar (CAT), Capital One Financial (COF), Cognizant Technology (CTSH), Deere (DE), F5 Networks (FFIV), Holly Frontier (HFC), Joy Global (JOY), Oracle (ORCL), Qualcomm (QCOM), Questcor Pharmaceutical (QCOR), and Schlumberger (SLB). (link: here)

While this list of companies might not appeal to DG investors and might not appeal to Growth Investors as a group of stocks to own, they each met our strategy and goals for owning them.

Some were dividend payers and some were not. But again, our strategy here was to find value, find stocks that paid a dividend, and find stocks that could provide capital appreciation. Best of all worlds? Buying them randomly, just because they fleshed out in a stock screen, is not a strategy. It's a starting place. The strategy is in the idea of "why am I investing in the stock market and what am I hoping to accomplish by doing so?"

Second: "Valuation Matters."

In my case, again being someone who invests in individual stocks, I need to ask myself, "Is this company undervalued, fairly valued, or overvalued at this particular point in time?"

The answer to that question is what should drive you to a decision point for either buying the stock or not buying the stock. At this junction, nothing else matters about the company in question other than the value of the company relative to its intrinsic net worth.

This might mean that even though you covet ownership of a particular company, that perhaps it is best to just walk away from that desire and wait until there is a better opportunity that presents itself.

While I would like to add new money to some of my existing positions, right now, I am not convinced that purchasing additional shares of many of the stocks that I hold is a great idea now. Instead, my focus has been to look for values that I may have overlooked. Sometimes these new companies are names that are unfamiliar to us. It's ok to purchase something other than a Dividend Champion, regardless of your fundamental investment strategy. Value is where you find it.

Not too long ago, I wrote an article about our Portfolio For Do It Yourselfers and the new companies that we were looking to add to that portfolio. Not only did we add these companies to this portfolio, but we added them to my own retirement IRA, my wife's Roth IRA, and my own Roth IRA. (link here)

Those companies were CA Technology (CA), CSX Corp (CSX), Safeway (SWY), Staples (SPLS), Western Union (WU) and Norfolk Southern (NSC). All six of these companies were priced at a value to intrinsic worth at the time of purchase and all of them paid a nice dividend as well. The gains from these companies has added value to our portfolios and each of the companies are still held in our portfolios with the exception of Safeway , which we have since sold.

Third: "What Is My Time Horizon?"

I have seen a number of comments that suggest buying a particular stock at current price levels for that stock "is ok" because the commenter is suggesting that he or she has a 20 year time horizon.

As a Dividend Growth Investor, I look at the reality that when I make a stock purchase at a value price, I can often get more shares of the company I'm buying than I would if buying that same company at a much higher price. Dividends are paid on shares owned. The more shares you have in a given position, the more dividend income that company provides you initially and if the Dividend Growth Rate is a large one, as in the case of say a company like Target (TGT) then the results that you will achieve with a longer time horizon, is accelerated with price at a value.

If I have a shorter time horizon, for example, in my own case, I am approaching retirement in a few months, then that time horizon becomes a more critical component of investing new money in the market.

Older investors, with shorter time horizons need to be more sensitive to the notion of "erring on the side of caution." There is no reason to jump into the river without taking the time to determine exactly how deep or how shallow the water might be, before taking that leap.

Fourth: "How Much Do I Really Know About Stock Investing?"

If the market is currently overpriced and investors should exercise caution here, then taking the time to learn more about investing is probably not a bad idea.

Those who are new to this (both younger investors and some older investors) need to examine their own expertise as to taking on risk in this market.

It can't hurt anyone to spend some time with some good books on investing strategies and how the market works. This suggestion is only prudent, but is often ignored as many investors seem to have this notion that somehow they are invincible to the realities of the markets.

As a Dividend Growth Investor, there are a number of books that are worth looking at. One of my favorite bloggers, "The Dividend Pig" has suggested 10 books that you might want to have in your financial library. Here is a link to his article.

Fifth: "What Is My Tolerance For Risk?"

Risk is an interesting thing. There are some that suggest a younger person should be assuming more risk as the younger investor has "more time" to recover from any mistakes made when taking on that additional risk. But what happens when you take on additional risk and have that decision blow up on you and that decision takes on life changing consequences?

Older investors, on the other hand, are often advised to take on less risk and err on the side of caution. In many of my more recent articles, I've suggested "thinking outside the box" and looking at alternative investment vehicles to the more "pure dividend growth" models. It's ok to deviate from the norm--just understand why you are deviating, what you are hoping to accomplish, and what the end game is going to be.

For those who invest in growth stocks, preservation of capital is a worthy goal. For DG investors, the desired end game is an annually growing income stream that supports our time as retired folks. Preserving capital and preserving income are both perfectly good goals. Increasing capital and increasing income, likewise are perfectly good goals.

Reducing risk to accomplish either one of those goals makes a lot of sense.

Final Thoughts:

Having lived through up markets and down markets I have to admit that even today, I have absolutely no idea as to where this market is headed. Like my experience in the past, I did not see the "dot com" bubble. I did not see "irrational exuberance." I did not see a lot of things coming.

I have always tried to make it my practice to buy quality companies at price levels that indicated value. For the most part, I've invested in dividend paying companies with my dividends being reinvested as a normal course of action.

This particular strategy morphed into a more pure play toward DGI over time with a stronger focus on Dividend Growth Rates and more attention to creating an ever increasing income stream.

I have never been in any particular hurry to invest in anything, including not only the stock market, but also other forms of investment opportunities. I generally take my sweet time and let things roll around for a while before I make a decision to spend my money on anything of value.

I tend to like things a lot more when the odds are "stacked in my favor" as opposed to making any assumptions that are based on some delusional notion that my own intelligence is going to lead to some major success in life.

My own experience tells me that it is better to know something to be the case than it is to wish something were the case.

Source: New Money Is Coming Into The Market: Don't Miss The Boat