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Value, dividend investing, growth at reasonable price, portfolio strategy
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Summary

  • There are many different ways to invest your money in the stock market.
  • Whatever method you choose, you should at least investigate alternative methods.
  • By looking at strategies other than your own, you might just find something of value to add to your success.
  • It is easy to let emotions get in the way of making sound investment decisions.

Introduction:

I have to admit, sometimes when I read articles on Seeking Alpha, I find that the comment stream can be even better than the actual article (my own articles included.)

In a recent article, there was one comment made that was a criticism of Dividend Growth Investing. There are a lot of these comments, especially lately as DGI stocks have appreciated to a point where the dividend yield points and the actual value of the companies that make up the universe of DG stocks has become "pricey" relative to the overall market.

As a result of the market growth, the average DG investor is finding that many of the stocks we own are no longer compelling values and at this time do not warrant additional purchases with new money.

On the other hand, there are DG stocks that are priced at a value and "stock picking" has never been more important in today's investing environment. So, it's "buyer beware" perhaps, for new money, but as part of the DG strategy, allowing dividends to increase and fund retirement or being used for other investments continues to be the strategy that many of us are following today.

An Interesting Commentary:

Here's what one commenter had to say and I think that his/her comment reflects the way that a lot of DG critics feel about this strategy. In and of itself, it is perfectly fine to have a different point of view, but again, opinions are one thing, facts are another.

What is a portfolio worth if it does not have KMB, CL, PG and the other DGI stalwarts which get you unscathed through the worst of storms? With DIVIDEND BONUS and DOUBLE COMPOUNDING, that is all there is for the common man to invest for success.

If you invest in indexes, you are just average. With DGI you get income stream whose growth outpaces inflation by a mile, you just wait and sometimes even pray for market crashes so you can buy some more, and every month you get rewarded by checks from your holdings. What is not to like?

Only DGI understand investing. It is a market of stocks not the stock market. Value is what you get, and the price is what you pay. What is rewarded in not timing the market but TIME IN THE MARKET. DGI have NO FEAR like other lemmings who crouch in fetal position afraid of every down tick in the ticker that they are so fixated on while the DGI sip their margaritas and just open the envelopes full of tasty dividends ever month. DGI's keep their ownership intact while getting their ever increasing income from their investments, while the indexers have to sell shares for income, and so they very soon run out of shares to sell, and then they have to die broke.

Breaking It Down:

What is a portfolio worth if it does not have KMB, CL, PG and other DGI stalwarts, which get you unscathed through the worst of storms?

Most Dividend Growth Investors are attracted to stocks which have become known as "dividend stalwarts." These are companies that have a history of increasing dividends on an annual basis for a long period of time. There is a group of stocks known as the Dividend Aristocrats. These are stocks that are members of the S&P 500 and that have raised dividends annually for 25 years or more. You can find a list of the current Dividend Aristocrats here.

There is also a group of stocks that you are part of a collection known as the Dividend Champions. Now, these companies have also increased their dividends annually for 25 years, but they are not all part of the S&P 500 companies. In addition to the Dividend Champions, there are also companies that have increased dividends annually for more than 10 years in a row and these are called Dividend Contenders. There are also stocks that have increased dividends for 5 or more years and these are the Dividend Challengers. You can find these companies here.

So, Let's Take A Look:

Kimberly Clark (NYSE:KMB), Colgate Palmolive (NYSE:CL) and Procter and Gamble (NYSE:PG) are companies found on both lists. They are Dividend Aristocrats and they are Dividend Champions.

They are also companies that are held by a number of investors who practice a Dividend Growth strategy. These and many other companies are a natural fit for the strategy of Dividend Growth Investing and they have proven to be beacons of safety, in the "worst of storms."

KMB increased dividends 26 out of the last 27 years. In 2013 the dividend yield was 4%. Dividend distributions were in March, June, September and December. The dividend payout ratio is 59%. In the last 10 years, the stock had an annual compounded return of 9.8% including dividends and stock price appreciation. This is 2.5% higher than the S&P 500 return of 7.3%. The company operates in the Consumer Goods sector.

CL increased dividends 35 out of the last 35 years. In 2013 the dividend yield was 2.6%. Dividend distributions were in January, April, July and October. In the last 10 years, the stock had an annual compounded return of 12.6% including dividends and stock price appreciation. This is 5.3% higher than the S&P 500 return of 7.3%. The company operates in the Consumer Goods sector.

PG increased dividends 41 out of the last 42 years. In 2013 the dividend yield was 3.6%. Dividend distributions were in January, April, July and October. The dividend payout ratio is 59%. In the last 10 years, the stock had an annual compounded return of 7.8% including dividends and stock price appreciation. This is 0.4% higher than the S&P 500 return of 7.3%. The company operates in the Consumer Goods sector.

I believe that these tables represent why I own KMB, CL, and PG in my portfolio. Like any other company that one might hold, buying them at a value price enhances the potential returns.

Investing For Success?

DGI stocks by definition have a history of growing dividends on an annual basis. Let's face it, there can be companies that pay dividends, but do not increase those dividends regularly. That makes them "dividend paying stocks" but does not make them "dividend growth stocks."

Reinvesting dividends back into the dividend growth stocks that are in your portfolio results in additional shares for those positions. It costs nothing to reinvest those dividends at most brokerages. The effect of "compounding" is often overlooked by some investors. Our commenter said:

With DIVIDEND BONUS and DOUBLE COMPOUNDING, that is all there is for the common man to invest for success.

Well, let's take a look at how an investor who owned KMB and CL, for example would experience the effects of dividend compounding. When you go to the Investor Relation site for many of these DG companies, you can find some interesting calculators to see how your investments would have done with your own start dates.

I began purchasing KMB and CL back in 1984. Since our commenter brought these stocks up, I thought staying with them might help to illustrate a few points.

A $1000 investment without reinvesting dividends would have grown to $18744. Not bad. But, had the investor reinvested those dividends, the results would have been very different over the last 30 years. The $1000 investment would have grown to $38014 over the time period. That's a difference of $19269.

When we examine CL, we find much the same thing.

A $1000 investment would have grown to $50,651 over 30 years without dividends being reinvested. But, with dividends being reinvested, the holding becomes worth $62,702 or $12051 more.

Now, KMB currently pays a dividend of $3.36 a share, which is a 3% yield. The investor who did not reinvest dividends, owns 167 shares and will receive $225 in dividends over the next 12 months. The investor who has reinvested dividends all along owns 339 shares and will receive $1139 in dividends over the next 12 months.

The CL investor who did not reinvest dividends owns 736 shares of CL today. The current dividend is $1.44 per share or 2.09% yield. That means this investor will receive $1059 in dividends over the next 12 months. The investor who has been reinvesting dividends since 1984 owns 911 shares. Those shares will return $1311 in dividends over the next 12 months.

I submit that based on these two examples you might safely assume that dividend growth stocks with dividends reinvested, actually compound income over time. I would also submit that the enhancement from reinvesting dividends (more shares = more income) one should make it a practice to reinvest dividends until the time that one needs them for income.

Summary and Conclusion:

In the next article, we will address some of the other points made, concerning DG Investing. I think the examples presented here, address why one might want to hold companies like CL, KMB, PG and other Dividend Aristocrats.

I think the examples here show how these companies can weather the storms of up and down markets. I think that the examples used here also show the value of reinvesting dividends, which from my own perspective is a critical part of maximizing results from using the strategy.

I promise not to linger on addressing the remaining points made by the commenter and will submit that article for approval before the week is out.

I look forward to a dialogue and hope that we can keep things civil and informative. Hope everyone had a great July 4th weekend.

Source: Dividend Growth Investing: Is It A Strategy Of Cliches?