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Dividend growth investing, retirement
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Summary

  • Many investors sabotage themselves with poorly timed trading.
  • Investment media push individuals in the direction of trading more, not less.
  • Dividend growth investing draws attention to growing dividends and can help reduce the temptation to over-trade.

It is widely accepted that many investors sabotage themselves by making emotional rather than rational decisions. Statistics show that many investors underperform the very instruments that they invest in.

How is this possible? They trade too much and time their trades poorly.

As an example, many investors in one of the S&P 500 index funds, such as (NYSEARCA:SPY), have fallen well short of the total return that SPY actually delivered over the past 5 years. This happened if they sold in fear when SPY was getting hammered in the crash of 2008, then did not wait to get back in until the market recovery was well under way. Since the market recovery began on March 10, 2009, anyone who waited until 2010, 2011, or later to get back in missed out on many of the index's returns.

Investment media and much of the investment advice industry constantly urge investors to "do something." Even if you turn the sound off, CNBC's graphics glorify moment-to-moment market obsession. Price drops are shown in an alarming red (Sell!). Price increases are shown in an inviting green (Buy!). Both subliminal messages are opposite to sound value investing principles and the goal of buy low and sell high. Talking heads often reinforce the same messages. The atmosphere seems frenzied.

When I began following a dividend growth strategy about 7-8 years ago, my view of stock ownership changed in many ways. What I want to focus on in this article is how it changed my psychological approach to the market.

Prior to becoming a dividend growth investor, I viewed my stocks as opportunities to gain or lose money from the market. After adopting dividend growth investing, I view the stocks that I own as providing opportunities to profit from the successes of the companies themselves.

The psychological impact should be obvious: The shift of attention from the market to the companies resulted immediately in less trading. The less that I was concerned with the prices of my stocks, the less I was concerned with opportunities to trade them.

Dividends Go Up, While Prices Go Up and Down

Remember the psychological findings from the beginning of the article: Investors sell at the wrong time, then buy back in too late, thus underperforming their own investments.

For me as a dividend growth investor, the temptation to sell is greatly diminished, because dividend movements look like this…

(click to enlarge)

…instead of like this:

(click to enlarge)

Johnson & Johnson's (NYSE:JNJ) price has gone all over the place in the past 10 years. It suffered steep drops in 2005-06 and 2008-09, ragged performance in 2010-11, and ragged performance for the last year or so. During the "lost decade" (2000-2009) it was considered by many to be dead money.

Had I owned JNJ with a "growth" mindset, I probably would have sold in early 2006 and certainly would have sold in 2008. In those days, I was typically using 10%-15% stop-loss orders. I might also have sold anywhere in the "lost decade" if I concluded that JNJ was simply going nowhere.

But I did not own JNJ until after I became a dividend growth investor. My gaze moved from CNBC's flashing price charts to dividend returns as shown in the first chart above.

From a dividend growth point of view, JNJ was never dead money. Since late 2007, it has been sending cash to its shareholders at a trailing yield that has varied between 2.5% and almost 4%, as shown here:

(click to enlarge)

I purchased JNJ for my public Dividend Growth Portfolio in 2010 and 2011. My wife and I also added it to our personal accounts at about the same time.

Here's the point: There has been no temptation to sell JNJ. Its ragged price performance since our purchases has taken place in the background. I hardly notice it.

In the foreground is the dividend performance shown in the first chart. From an initial yield on my first purchase of about 3.4%, JNJ's dividend has climbed to a yield on cost of about 4.6%, with another dividend increase expected in May. If the new increase is about 8% (like last year's), my yield on cost will go to 4.9%.

In other words, JNJ is doing exactly what I want it to do. If its price were to suddenly decline 20% or 30%, it would still be doing just what I want it to do. Therefore, I have no reason to sell it.

Here are price and dividend charts of a few of the other stocks in my Dividend Growth Portfolio. In these charts, I have plotted the price and dividend on the same chart, not only to save space, but also to vividly show the difference between the messages that prices and dividends send to you.

(click to enlarge)

(click to enlarge)

(click to enlarge)

Conclusion

For me, there have been many benefits from dividend growth investing. One benefit is psychological. My attention is mostly on dividend returns, not much on short-term price returns. The dividends are comforting, and they help me plan my eventual income stream for when I am living off of them in retirement.

Across a whole portfolio of dividend growth stocks, the path toward the eventual income rate is quite reliable. It can be plotted along the way to see if you are on track to meet your goals. Plotting progress based on prices or total returns is much harder (or impossible), because prices change so much compared to the stair-step progress of growing dividends.

Source: The Positive Psychology Of Dividend Growth Investing