Admitting My Bias
So there is no misunderstanding the bias that I bring to this article, let me start off with a disclaimer: I consider myself a dividend growth investor. I'll also state up front that I have conducted no scientific research or conducted any surveys. My sole database that I've used to identify what I think might be a problem with dividend growth investing is the Seeking Alpha website, specifically the articles and commentary.
I spend a fair amount of time scanning articles of interest to me, and then reading comments to those articles, with a large portion of my time spent in the dividend and income and retirement areas. There have been articles asking if dividend growth investing is in a bubble, and there have been those that have defended the case that it isn't. Other discussions have been modern portfolio theory versus the dividend growth investing camp, the dividend paying versus the share buyback, or whether it's a better use of funds for a company to reinvest those funds into other assets versus paying dividends. Some of these may be legitimate debates, but they may also be the "it depends" type of arguments.
And then there have been comments such as these below. I'm slightly modifying them for anonymity reasons but the substance is the same. And simply for purposes of distinguishing between the two I'm labeling them non dividend and dividend groups. From the non-dividend group:
- "Dividend growth investors are overly fixated on dividends."
- "The dividend investing crowd has become a cult."
- "Dividend growth investors must believe the stock will never get to where you lose your initial investment."
And these comments from the dividend group:
- "A stock that doesn't pay a reasonable dividend is not really a stock at all"
- "Buying stocks that don't pay dividends is like trading sports cards."
- "Don't worry about where you buy it you'll make it up on dividends or averaging down."
While experienced investors would not take these comments seriously, there are many inexperienced investors who may not understand these. In my opinion, these comments illustrate what I believe is a "problem" with dividend growth investing. It is a problem of perception. From the perception that dividend growth investors are only focused on the dividend to those that say dividend investing is the only way to go. There are too many who don't, in my opinion, understand what it is and what it isn't.
There are a lot of excellent articles on dividend growth investing on Seeking Alpha. To be quite honest often when comments such as these are made they are quickly called out by what I'll term the leading voices of dividend growth investing. They typically will provide well articulated reasons for different investing styles that fall under the dividend growth investing umbrella. These individuals are always, without exception, very helpful as well as patient in their responses to questions or comments. Again without doing a number count on the comments, it appears to me the majority of expressions similar to those noted above are coming from over-zealous individuals who don't truly understand dividend growth investing.
It Is What It Is
So what is it that they don't understand? In my opinion, it's that dividend growth investing is simply a strategy to achieve a purpose. It is not a panacea for investing but rather a means to an end. All strategies have advantages and disadvantages. All too often we develop tunnel vision as if our way is the only way. Where I formerly worked it was referred to as "my way or the highway." We fail to realize there are cogent arguments to be made for a number of different methods to achieving our investment goals, whether its dividend growth investing, value investing, momentum investing, trend trading, options, etc. Which strategy or method is best depends on ones particular needs, desires, financial situation or personal circumstances, background, and if managing one's own portfolio, their individual style and preferences. Dividend growth investing supports a variety of different purposes or objectives, some of which I've shown below:
Obviously this is not all inclusive and there are a myriad of ways to utilize dividend growth investing for each of these purposes shown above, even if it's a combination of two or more of these purposes. I elected to utilize dividend growth investing because I think it's the best for my situation and my investing style. Does that mean other ways won't work for these same purposes? Absolutely not. People make different choices dependent upon their situation. It's also important to point out that there is still the development of individual goals, strategies, tactics or techniques, and rules that would need to complement the selection of dividend growth investing as an overarching investment strategy. I'll illustrate using my own purpose and investment strategy.
I am retired and live off a defined benefit plan from my former company. Separate of that I had a 401K that I rolled over into a traditional IRA. To correctly manage my IRA I believed I needed to define my purpose for it, or the reason I was investing if you will. So I developed a purpose statement, what some may call a mission statement. Here it is: My purpose for investing is to create a future income stream that will be useable starting in 2023 and that will not require depletion of the capital. Everything I developed after that, the plan document containing strategies, goals, rules, risk management, etc. all had to align with that purpose. For purposes of the chart above my purpose statement could conceivably fall under every category except income needed now. I want to grow the future income while at the same time growing and preserving the capital. I chose to dividend reinvest to do that. My intent is for it to be discretionary income but circumstances could change that.
While 100% of my portfolio pays dividends, not every holding is in it because of paying dividends. 60% of my portfolio is in what I consider core long term holdings with companies such as McDonald's (MCD), Coca Cola (KO), Waste Management (WM), Southern Company (SO), and Procter & Gamble (PG). 24% is in either closed end funds such as Aberdeen Asia-Pacific Income (FAX), Tortoise Energy Infrastructure (TYG), John Hancock Preferred Income (HPI) or Business Development Companies such as Main Street Capital (MAIN). About 10% of it is in other stocks such as Mosaic (MOS) and Silver-Wheaton (SLW), what some would call speculation or cyclical and about 6% is in cash for future purchases. I have a total of 25 positions, others have 50 or more, some have fewer. Each holding is there for a specific reason, to help me achieve my objective as stated in my purpose statement. I also periodically tweak it by selling speculative holdings, rebalancing, and adding other holdings. What I personally like about dividend growth investing is that it allows me to work toward my goal with a simple yet effective strategy. That doesn't mean easy or little work. And it can be molded to fit not only my goals but also my personal investment style, i.e. what I'm comfortable with and that will allow me to sleep well at night. Other dividend growth investors would structure their portfolios differently and select different holdings, and rightfully so, because they have different goals, time frames, needs and circumstances.
Does this all mean I'm overly fixated on dividends or that I'm a member of a cult? I don't think so (No one has shown me a secret handshake). Dividend growth investing has been around too long to be considered either a cult or a fad, although admittedly the popularity of it has grown. Neither does it mean that I have to believe I'll never lose my initial investment as in the #3 comment above. I still have to manage risk and monitor my portfolio. I still have to make good decisions using sound judgment concerning each individual selection in my portfolio. And I still have to make sure each selection meets my purpose and goals. Dividend growth investing, for my purpose, allows me to focus on the growth of income, which frees me up from constantly worrying about the current share price from daily, weekly, monthly, or even yearly movements. But it is not a "set it and forget it" proposition.
In regard to comment # 4 & 5 above, I will simply state that I'm confident there are a number of investors using dividend growth investing as their current strategy that built their original portfolio using some other strategy. And # 6 does a huge disservice to inexperienced investors in that not considering valuation correctly can take years to overcome.
Is there a problem with dividend growth investing? If there is, it's not with the concept or strategy of using dividend growth investing, it's with the perception that people are getting from various sources. What I'm trying to say is that individual investors need to understand there's a lot of noise in the investment jungle. Filter out the noise and follow the tried and true paths already traveled. Find out who the good guides are and learn from them. As Ronald Reagan said, "trust but verify." Develop your strategy and tactics and mix due diligence with sound judgment. I've said you can fix just about anything with WD-40 and a roll of duct tape but even those won't fix poor investments combined with bad advice.
Additional disclosure: I am not a professional investment advisor, just an individual handling his own account with his own money. You should do your own due diligence before investing your own funds.