Dividends In Investing: How To Sleep Well At Night

Includes: KO, MSFT
by: Eric Landis


While earnings are certainly an important focus in selecting companies for investment, dividends received are a much more predictable metric.

For an investor at or nearing retirement, the reliability of these dividend payments can make the volatility of the market much less worrisome.

Focusing on the steady dividend income of your portfolio rather than the up and downs of capital gains can help you hold through a down market.

There has been plenty of banter of late on Seeking Alpha regarding the importance (or lack thereof) of dividends in your portfolio. While the back and forth articles have been generally entertaining to read, I think they have missed the most important point in my mind, and that is simply that dividends are about the only near sure thing I can count on when making an investment.

Pick An Analyst Estimate Game

There are plenty of analysts who are good at predicting what a company will earn from quarter to quarter, and sometimes even year to year, but even these industry experts provide a wide range of expected results. For example, according to Yahoo Finance, there are 26 analysts forecasting 2014 earnings for Coca-Cola (NYSE:KO), with a range in annual earnings estimates of $2.04-$2.12. Morningstar shows 9 analysts forecasting a range of $2.08-$2.12 and MSN shows 11 analysts with a range of $2.05-$2.12. Coca-Cola is one of the most widely covered stocks on the market and there are just 4 months left in 2014, yet there is no consensus among analysts on what the company will earn this year. Looking to 2015, the spread widens considerably among the three sites, with a range of expected earnings from $2.07 to $2.30 per share, which is greater than a 10% spread.

If paid professional analysts with just four months left in the year can't predict what Coca-Cola will earn, how can I expect to do the same?

If you think this is depressing, take a look at another well-followed company, Microsoft (NASDAQ:MSFT) and the earnings estimates from various sources.

Fiscal Year Earnings Estimates
2015 2016
Morningstar High $3.84 $3.24
Morningstar Low $2.59 $3.03
Yahoo High $3.15 $3.84
Yahoo Low $2.47 $2.96
MSN High $2.91 $3.49
MSN Low $2.48 $2.98
Click to enlarge

If relying strictly on earnings to guide your investments, how do you know what to follow? The estimates above vary by as much as 7% to nearly 50%, and these are just projections for the next two years!

Now don't get me wrong, company earnings are the mother's milk of all that exists for a company's long-term prospects. Growing earnings and/or the speculation for expected future earnings are what drives an increasing share price in the market. However, as market sentiment ebbs and flows, what people are willing to pay for those earnings changes on a continual basis, and as shown above there is a wide range of expectations among analysts on what different companies will earn going forward.

A Different Way To Invest

I began reading articles on Seeking Alpha in early 2013 as I was doing some research into the tax implication of holding REITs and MLPs on a portfolio. Along the way I happened to run across some articles by a few authors specializing in "dividend growth" investing.

Up to this point, I had strictly been a "total return" investor, which in reality is more of a trader than an investor. I would frequently buy positions in the hot names, fast growers and high risers only to see the tides turn and the bottom fall out. Chinese stocks, nano-tech stocks, HD television manufacturers, rare earth metal mining stocks -- you name it, I probably owned it. The end result would be one of two scenarios: I would either sell too soon after getting a big gain and then watch the stock rise another three- or four-fold; or I would hold losers for too long and see a complete loss of capital. This strong desire to look for potential "home runs" rather than focusing on a proven track record and hitting "singles" and "doubles" led to a pretty low investing batting average and generally lousy returns.

Fortunately, in the comments section of one of those first articles I found on this site, a user named Chowder happened to recommend a book called "The Single Best Investment" by Lowell Miller. This book completely changed my point of view when it came to the stock market. By focusing on high-quality companies with long track records of paying above market dividend yields that increase annually, an investor can take much of the volatility out of the market and build a compounding machine that continues to grow your income over a long period of years.

Don't Sweat Mr. Market's Mood Swings

As I mentioned above, earnings estimates and quarterly results are generally how companies are valued by the market. Analysts post their estimates, change them as they gather information, and we all look forward to the quarterly release to see if the stock should move higher or lower based on the results. An example of this earnings and price volatility can be seen in the 5-year charts for the two companies mentioned above, Coke and Microsoft.

KO Chart

KO data by YCharts

As you can see, price generally follows earnings over time. A strong quarterly number will lead to a rising price while weaker earnings causes the price to fall before an uptick brings prices back up again.

Now take a look at the dividend payouts from each company, this time over the last 10 years. I'll also show the prices over the period to show the stark difference between price volatility and dividend payouts. KO Chart

KO data by YCharts

Through the Great Recession, sequestration, debt ceiling debates, wars in Afghanistan and Iraq, the Affordable Care Act and countless other "news" items, the dividend payouts continued their slow and steady ascent.

Investors who bought at the start of 2005 and chose to reinvest dividends along the way would have earned a 9.9% annual return with Coke and 7.4% with Microsoft, both beating the market's return of 7.0%.

I'm not a professional analyst, but I can predict with near certainty that Coke will pay out $0.305/share in each of the next two quarters and also predict with near certainty that they will raise the dividend next spring, likely to around $0.33/share per quarter.

Microsoft will pay $0.28/share this quarter and will most likely again increase the dividend in November, also to somewhere around $0.33/share.

This can be predicted because both companies have shown a track record of consistent increases, as Coke has raised its dividend for the last 52 consecutive years, while Microsoft has an 11-year streak of increases since it instituted a regular dividend in 2003.

Sleeping Well

It is great comfort to know that when prices fall due to a surprise quarter or general market sentiment, I can count on these quarterly dividends to continue coming in. Then with re-investment buying at depressed prices, I can grow my income stream even more quickly as a result. By focusing on the rising dividend income stream rather than strictly on my day-to-day total return, I can take much of the stress out my investments.

I am now actually investing rather than speculating and by buying strong companies with a proven track record, I don't worry nearly as much when they have a poor quarter and the share price falls. Rather than being disappointed with seeing some paper gains disappear, I get to enjoy a higher yield for dividend reinvestment and more shares added to my account that will pay more dividends over the next 20+ years I have until retirement. It's almost become a heads I win, tails I win type of mentality, which is a diametrically opposite mentality than the Chinese internet, shiny object investing I was previously accustomed to.

Dividend Growth Resources

There are many more companies that have similar long track records of increasing dividend payments. In fact, Seeking Alpha contributor David Fish maintains the U.S. Dividend Champions spreadsheet that includes all of the U.S.-traded companies that have a streak of 5 or more years of dividend increases. The current edition of this spreadsheet shows there are 550 companies that have paid increasing dividends for at least 5 years, of which 107 have increased for more than 25 years. I can spend hours scouring the tabs for new investment ideas as there is a ton of information included. In my opinion, in addition to the "Single Best Investment" mention above, this spreadsheet is the top place to start for anyone interested in dividend growth investing.

Another excellent place for research is the dividend growth company information web site run by Seeking Alpha contributor Robert Allen Schwartz. This site shows the varying compound annual growth rates of dividends by all of the companies on the Dividend Champions spreadsheet and is easily navigated to find the best performers over the years.

Finally, there is a vast resource of contributors on Seeking Alpha who have shared their investing ideas with the dividend growth strategy. For example, I have shown the progression of my personal 401k portfolio from the beginning of the transition to the most recent quarter as a way to chronicle the investing style, and also as a way to learn from the feedback in comments left by Seeking Alpha members.

Some of those members also share their portfolios and investing methods with frequent articles. Some authors I follow that I would recommend checking out include: David Crosetti, David Van Knapp, The Part-Time Investor, Bob Wells, Eli Inkrot, Eddie Herring, Dividend Mantra, Chowder, Chuck Carnevale, Mike Nadel, Tim McAleenan Jr., and Dividend Growth Investor. I apologize for anyone I left off the list, but these were the ones that were on my recent timeline and I think represent a good breadth of knowledge on the subject.


By shifting my focus away from the day-to-day fluctuations of my portfolio's balance and instead concentrating on the long-term growth of the income it produces, I have taken much of the stress out of my investments. While the occasional big sell-off is still a bit painful, I find comfort in knowing that my regular reinvestment of dividends is being supercharged by the higher yields. I suppose the saying "short-term pain leads to long-term gains" rings true here, just as in many other parts of life.

Disclosure: The author is long KO, MSFT. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am a Civil Engineer by trade and am not a professional investment adviser or financial analyst. This article is not an endorsement for the stocks mentioned. Please perform your own due diligence before you decide to trade any securities or other products.