Dividend Investing: Resisting The Urge To Get Rich Quick

Mar.26.12 | About: Intel Corporation (INTC)

In most groups, important sub-groups emerge. When things work well, group members disseminate information and share experiences with the intent to educate, encourage and support one another. In various parts of Seeking Alpha, this dynamic plays itself out.

If you look at the top of the page, click the links and delve into the various sub-sections, you'll see what I mean. We've got commodity freaks, gold bugs, macro-political nerds, ETF geeks, Apple (NASDAQ:AAPL) fanboys and girls, Research in Motion (RIMM) apologists, media lovers and options traders. Of course, each faction brings its own unique level of utility, but generally you can always pull tidbits and gems from most areas of the site that help make you a better investor.

We learn from one another's mistakes and successes. And personally, I benefit from hearing other investors' stories of persistence. This process functions best in the Dividends & Income section of Seeking Alpha. One of the best parts about that segment- and most parts of the site- are the diverse voices.

Dividend articles come from all points of every spectrum, particularly along the range from the young to "old." There's nothing like reading articles from long-time dividend investors who have "made it" and now collect considerable income, often enough to live on, from their positions. At the other end, we have contributors such as Tim McAleenan, who is much younger than me, but wise beyond my 36-plus years.

Tim wrote an excellent article - The Beginning Days Of Dividend Growth Investing - that ought to be required reading in high schools and universities nationwide. It's not that Tim said anything incredibly profound in that piece. Sometimes, we just make investing too complicated, looking for some magic formula or, worse yet, quick fix to get us to where we want to be. Tim set the stage for why some investors abandon the routine dollar-cost-averaging dividend reinvestment:

For example, if you've already got a portfolio generating $3,000 in annual dividends, it's easy to stay the course and reinvest your dividends or pick new companies to plow thousands of dollars in monthly cash into. For every month that our friend generating $3,000 per month in dividends sits on his derriere and merely checks the "reinvest dividends" box on his brokerage account, he's probably baking an increase of $100 or so into his annual dividend stream.

But when someone is first starting out with dividend growth investing, it might be much harder to find the discipline and motivation to stay the course. After all, if you invest $250 into Johnson & Johnson (NYSE:JNJ) each month for the next three years, you're likely going to be generating about $320 per year in dividends, or a little more than $25 per month. For some, this could be discouraging. But I don't see it that way.

I'm not too proud to admit that in my younger years, and even a bit in my older years, impatience shook me out of several positions before they had a chance to establish themselves and provide encouraging results. Or, I just could not resist the allure of relatively quick access to a considerable pile of cash. Consider my recent example of bailing out of McDonald's (NYSE:MCD) dividend reinvestment plan back in the late 1990s:

I am not sure why I sold. I moved to San Francisco that month. I probably needed the money. Or maybe I took it out to buy something. I really do not know. What I do know is that I should have never sold. And the fact that I did serves as a testament to the power of buy-and-hold, dollar-cost-average investing in dividend-paying stocks ...

If we use June 15, 1999 to figure it, my 59 shares of MCD were worth $2,456.17 at the time. At the end of 2011, without even factoring in dividends and more purchases, they would have been worth $5,919.47. That's more than a double had those 59 shares stayed 59 shares ...

[Had I continued on the same investment track, I would have accumulated] 555 shares of MCD [for] a value of $55,683.15 at the end of 2011.

Even though I spend a fair bit of time on Seeking Alpha dealing with speculative situations, the majority of my portfolio sits in dividend-paying investments. Some of them have come along. Others are at that boring stage McAleenan describes.

I recently decided to take a position in Intel (NASDAQ:INTC). As often as my cash flow allows, I scale into INTC alongside several other dividend-payers, two to three speculative plays, an ETF or two and a mutual fund or two. With what's left over, I make options trades and investments. Here's how the INTC stake looks in its relative infancy:

Click to enlarge:
Click to enlarge

That adds up to 21.6202 shares of INTC. As of Friday's close, they're worth $602.66, up about 2%. Over the course of two months, I've averaged $98.33 per investment and collected a small dividend on my lot about halfway through.

If I continue at a clip of 21.6202 shares per quarter, I will have 86.5 shares at the end of the year. Of course, that does not take into account any increase in my average investment, share price fluctuation and the uptick dividend reinvestment provides. On 86.5 shares, I would collect (and reinvest) an annual dividend $72.66, just $18.17 per quarter. For the sake of argument, let's just say that puts me at 89 shares.

Going at it in INTC for another ten years, and NOT factoring in dividend reinvestment, dividend increases or share price appreciation, I would end up with 979 shares. At Intel's present dividend rate of $0.84 per share, that's $822.36 of annual income on the shares. And, again, I have woefully underestimated the number of shares I could actually have 10-11 years from now, assuming my cash flow stays the same or improves.

That's incredibly crude data for just one stock, after only a decade or so. I presently dollar cost average (DCA) into five other stocks at the same or a similar rate as INTC. Each stock sits at a different point in the wealth-building process. If I focus on adding solid holdings, selecting other non-dividend paying winners and increasing the amount I can invest, the outcome should put me into a favorable situation in a decade or two.

The key, however, as McAleenan described, is not getting tired and bored with myself or the process. At the beginning, it's a rather slow, methodical sludge. Human nature tells us that we could put our cash to better use elsewhere by trading or investing it more "aggressively." While there's a place for that - and I do it in my portfolio - I don't think it should be the overarching strategy for a majority of investors with an eye on an early or on-time retirement.

Like trading, long-term investing should be pretty boring. I'm not sure frequent adrenaline rushes are good signs. The only excitement should come when you check in on things and notice that the power of compounding has started to kick in.

Disclosure: I am long INTC.