Are Dividend Growth Investors Idiots?

In a recent article by John Heinzl (Globe and Mail) he asks himself if, as a dividend growth investor, he and all other dividend investors are idiots?  Heinzl outlines the feelings that we typically have every so often as dividend investors.  That is, missing out on the “multibaggers” that everyone is talking about around the water cooler at work.

Here is a quote that sums up how us dividend investors might feel at the moment:

…Because when everyone else is doing the logical thing and shoveling money into growth stocks that are shooting to the moon, only a big fat idiot would stubbornly sit on a portfolio of boring dividend stocks that are, for the most part, doing jack squat.

It’s interesting that he mentions high flying stocks like Potash Corp. (IPI) and Research in Motion (RIMM) as being the ones that he missed out on, while he talks about owning our favorite dividend growers - banks, insurers, pipelines and drug makers.

How Far Can You See?

When investing in dividend growth stocks , it isn’t about making a killing this week or this month.

• It is about investing for the long haul and watching your dividend income rise consistently year over year while your “investor” counterparts are searching for the next hot tip.
• It’s about holding onto that dividend paying stock and not worrying about the stock price, as long as that dividend keeps growing.
• It’s about protecting your hard-earned money from inflation and making your money work for you.
• It’s about knowing the company can’t fake a cash dividend.
• It’s about money in your pocket.

Over the long term we know (and Heinzl reiterates) that dividend growing common stock prices also out perform those stocks that pay stable or no dividends.

So What Now?

There is a famous saying from Warren Buffett that goes something like this:

“Be fearful when others are greedy, and greedy when others are fearful”

Of course this is easier said than done, otherwise we’d all be running a multi-billion dollar company like Berkshire Hathaway (BRK.A).

While it may take some serious resolve to start loading up on some of our favorite dividend payers, most  notably banks stocks, sticking to a long term plan will make you rich in the long run.

So, to echo the words of Mr. Heinzl I’ll end with this quote:

Am I going to sell my dividend stocks to buy these high fliers now? Hell, no. If anything, I’ll be adding to my existing positions, and reinvesting the extra dividends in even more shares to take advantage of the magic of compounding.

So, don’t worry about the water cooler talk and stick to your plan.  Soon enough you’ll be saying good bye to the water cooler forever when the compounding effects of your rising dividend income begins to exceed your salary!

Here’s to your wealth!

Comments

[its_paul:]

well, while hes long adding positions and still losing money, ill count my coin and take that to get into those long bank positions once they bottom out.

2008 Jun 18 03:25 PM

[Dividend Gr...:]

Tyler, the old saying says" When they are crying, you should be buying. When they are yelling, you should be selling".
I love it when every dividend investor on the planet throws in the towel and capitulates. That will be a great day for bargain hunters..

2008 Jun 18 04:00 PM

[whidbey:]

Please! it is not one or the other, but some blend of both. Any portfolio needs a core of income-dividends, and sectors for growth and value. I do several sectors (even PM). I am making money at present. I don't feel even slightly bipolar. Will, that may be going too far, but I still can pass as normal.

2008 Jun 18 07:48 PM

[buyitcheap:]

Anyone who would ride out a 15% correction in their portfolio when they could have hedged or gone to cash is foolish. It's about money management - selling the principal under winners to recover your capital and not tolerating more than X% of a downturn in any stock any time - trail those stops. We're heading south hard right now, and we're not done.

2008 Jun 18 10:01 PM

[truthinvesting:]

if you buy PM FT and MO and UT you will do fine and keep collecting the great dividend

2008 Jun 18 10:21 PM

[User 168168:]

Great Read. The market can't be timed or at least I can't time it. Furthermore, I know very few people who can time the market over the long run. I have been investing and trading for 30 over years, with some wins and loses. It seems every few years there are a different group of high flyers - making it virtually impossible to pick the correct high flyers. Fortunately, the only stocks that seem to have worked for me over the course of time are dividend payers such as WRE, PG, etc. For example, I bought 500 shares of WRE in 1993 for $22 and change, the stock has been up and down over time. Currently, around $32 - however, the beauty is the dividend has increased every year and I reinvest the shares - currently around 1000 shares. Thanks for the reminder.

2008 Jun 19 12:23 AM

[Dividend Gr...:]

Buyitcheap,

Market Timing might work for you, but it doesn't work for 95% of investors/trades/specu... If you have saved losing 15% then congrats to you.

2008 Jun 19 09:02 AM

[John Lounsbury:]

I agree with xi Hu - diversify investment strategies. Also, modify each strategy based on current market conditions. If you use stops on long positions, tighten them when the applicable moving averages (eg, S&P 500) are dropping. If the market is whip-sawing, follow a strategy that buys lower end of the trading range and sells higher end. If the market moving averages are heading lower, incorporate some short selling.

Don't time the market, but definitely react to what is happening and remain alert to changes of market direction.

2008 Jun 19 09:41 AM

[notsosmart:]

in my retirement the drip plans along with that cost averaging have served me well.it should be a part of all portfolios.how much? i dont know.

2008 Jun 19 10:09 AM

[Lynn Johnson:]

In my IRA account I load up on dividend paying stocks but I don't believe in sitting indefinitely if stock is going down. I normally tolerate an 8% loss in a non-IRA but haven't figured out what my bottom should be if dividend stock goes down and down. Anyone have a suggestion?

2008 Jun 19 10:20 AM

[kurt walter:]

Why can't you invest in both dividend growers and growth stocks? Maybe 80 percent of the portfolio in dividend growers and 20 percent in non-dividend paying growth stocks.

2008 Jun 19 01:04 PM

[Old Trader:]

Lynn....you might want to see what the historical trading range is for the stock, rather than relying on a purely arbitrary number.

jan

2008 Jun 20 12:43 AM

[silverwolf:]

hi Lynn, I just wanted to point out what Peter Lynch and Warren B. reminded investors in the past. If you can't watch your stock fallling 50% of the value and have to sell it, then you can't be a investor in stocks. If you hold a quality company and the stock drops in price without serious flaws in business fundamentals then you should hold on to the stock regardless price drop. Otherwise you will continue to lose your capital. If you look at most high quality stocks that kept going up in the past in the long term, most of them fluctuate about 50% from year's highest to year's lowest price. If you decide to sell because it dropped 8%, you are just going to lose your capital on a really good stock, assuming you did your homework in picking strong business fundamentals.

2008 Jun 21 10:05 AM

[golds:]

Your portfolio or asset mix all depends on where you stand in life. If you are retired and your dividend checks are more than covering your cost of living (plus FEDlation) then you really are not missing much. With the market in it's current phase you are looking pretty smart. At some point you realize that life is more about how you spend your time than adding to the pile. Once your children are educated or maybe even funded you should try to find some enjoyment before your ticket gets punched and the big boss calls you to your final meeting. Some even believe that you should spend time helping those that have drawn bad cards (karma ect). When I was a younger man I viewed life as a war of survival. As time goes on these ideas still linger but my mind opens a bit more everday to the concept of walking instead of running. If your not careful money will become your master instead of your servant.

2008 Jun 23 08:32 AM

[buyitcheap:]

Oh, now that's a little disingenuous. Lynch was a fund manager with a vested interest in managing your money. Buffett well, he's as much a private equity buyer as anything and had an enormous float cache from his insurance companies to buy from so he could act opportunistically whenever he felt like it. Interestingly, he wound up buying a bunch of companies I'd invested in Dairy Queen, Franchise Finance, Fruit of the Loom and a couple of others which robbed me of a good long term investment. :-)

If you're buying, you should be buying after that 50% loss. The truth is, Peter Lynch as a fund manager could not have stayed in his post being brilliant if he either didn't trim losses quickly OR averaged down so much that he could help but show a gain a few months/years later. I don't know if I'm sold on averaging down, I'd rather dump out at 8% max and then if the thesis on the company is still solid but just had a one time "event" i.e. a strike or power failure at aplan or other such issue that gave me a better opportunity to buy cheaper, much cheaper with capital I've preserved. Best to all.


On Jun 21 10:05 AM silverwolf wrote:

> hi Lynn, I just wanted to point out what Peter Lynch and Warren
> B. reminded investors in the past. If you can't watch your stock
> fallling 50% of the value and have to sell it, then you can't be
> a investor in stocks. If you hold a quality company and the stock
> drops in price without serious flaws in business fundamentals then
> you should hold on to the stock regardless price drop. Otherwise
> you will continue to lose your capital. If you look at most high
> quality stocks that kept going up in the past in the long term, most
> of them fluctuate about 50% from year's highest to year's lowest
> price. If you decide to sell because it dropped 8%, you are just
> going to lose your capital on a really good stock, assuming you did
> your homework in picking strong business fundamentals.

2008 Jun 29 12:13 PM

[buyitcheap:]

I enjoyed your article and I don't think we're in disagreement fundamentally, the distinction I was attempting to make,and I guess poorly, wasn't market timing. It's capital preservation.

By way of example, back in September, The dividend newsletter of Morningstar was touting CSE (Capital Source) around 23-35, nice dividend, etc. 5 months later, after its mess with bank buyout, it was at 10 and is still around 10. an 8% stop would've gotten you out around 21-22. If you believed in the company, after doing additional analysis still, you could have almost doubled your position with the same capital. That's the key here - you have your capital, you haven't risked new money, and you still have the opportunity to buy value and a good dividend. As you know the market is littered with good dividend payers (Lucent?) that went to zero. I just don't want to take that ride.

I definitely buy into the dividend investing model, but I also very much like to protect against the permanent impairment/loss of capital.

I look forward to future articles.

2008 Jun 30 02:25 PM

[Limoman:]

"Over the long term we know (and Heinzl reiterates) that dividend growing common stock prices also out perform those stocks that pay stable or no dividends."

Re: I haven't found this to be true for me..thus I gave up and just bought all Balanced Funds these past 10 yrs..They ave about +10% yr, don't loose $ in a Bear and give me + 6% yr to live on, while leaving the other 4% for Fedlation....Happy camper..

2008 Jul 30 07:03 PM