One of my favorite Seeking Alpha contributors, David Crosetti, wrote a powerful article about dividend growth investing (DG) at the end of March that stirred up quite a bit of productive conversation. In this article, David pointed out his main tenets of his investment plan:
As a Dividend Growth investor, I look for stocks that meet a very specific criteria. First, I want to buy stocks that pay a dividend and have done so for a long period of time. Second, I want those dividends to have been increasing annually for at least 5 years. Third, I want those dividend increases to be greater than the rate of inflation, whenever possible. Fourth, I want to own companies with the earnings power to continue raising those dividends moving forward.
Without a doubt, this is a solid investment plan which not only mitigates much risk, excluding companies that may have slashed dividends or could be in trouble financially, but encourages dividend growth and compounding leading to glorious returns when followed diligently over a long period or time. It may not be the most exciting plan to every investor -- especially those looking for quick gains or volatility -- but it's difficult to argue this investment path would steer anyone wrong if followed correctly.
With that said, here's when dividend investing gets really risky:
When I first began investing, I strictly followed the DG path, buying up shares of stocks that fit David's criteria listed above. I didn't really stray from this plan for fear of taking on capital losses. I had never gone with stocks that exhibited riskier price movements or had stopped growing its dividend or consistently grew earnings per share. Procter & Gamble (PG) and Johnson & Johnson (JNJ) were about as risky as I was willing to go. Until the BP Macondo Deep Water Horizon spill of 2010.
I watched as BP plc's (BP) market cap eroded by nearly 50%, dropping the share price from $60 a share to around $29. Though my instincts told me to stay away, my itchy trigger finger had me checking BP's share price religiously to see if I could capitalize on a piece of this risky investment venture. After speaking with my coworker, Daniel, and being somewhat convinced BP wouldn't be going anywhere long-term, I ended up taking the risk and jumped in, buying shares near the bottom at $30.03. I would be lying if I said I slept well the following few nights, but in time the stock rebounded quite nicely and, though it was initially cut, the dividend yield has bounced back to about 4.5%. We may not yet be out of the woods, but that risky maneuver of mine, looking to scoop up the company at a discounted value rate, actually turned out to be a good move.
More recently, I also bought shares of General Electric Company (GE) last year at $14.86 after the shares had taken a beating, possibly in relation to GE not paying any taxes in 2010 (just a wild guess there) and just before Congress finally came together to raise the debt ceiling. This is another stock pick that is chastised by DG investors due to the fact GE slashed its dividend quite significantly in 2009. However, the way I look at it is I jumped in at a time when the dividend was yielding north of 4%, (prior to any recent dividend raises) and had a very good chance to see some significant capital appreciation along the way. From where I stand right now, it appears to have been a good move.
This discussion wouldn't be complete without mentioning the energy giant Exelon Corporation (EXC). EXC may have indeed suspended its dividend growth for a few years running, but, as many other investors around this site have pointed out (including the knowledgeable Mr. David Fish), EXC could be a major bargain right while sporting a forward P/E of 12.5, a dividend yield of 5.5% and a payout ratio of 56%. I've been picking up shares with fresh capital whenever I can when the share price dips below $39 a share and though the dividend growth isn't there I'd still argue it's one of those "risky" dividend plays that's at least worth looking into.
The bottom line:
As David Crosetti so eloquently pointed out, DGI is a faithful strategy that many intelligent individuals use as a successful wealth-building strategy. Clearly it works. Being a young guy myself still looking to take on some risk while at the same time being someone who can't get enough of those quarterly dividend payments, I've found ways to include "riskier" dividend-payers in my investment arsenal. Not every investment move I've made has been successful, but as investing great Peter Lynch put it:
In this business, if you're good, you're right six times out of 10. You're never going to be right nine times out of 10.
If you think I'm wrong or severely need a reality check, feel free to let me know in the comment section below. Until then, I'll continue searching for those "risky" beaten-down dividend-payers that tend not to fit the DG strategy - alongside my trusty DG investments.