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Value, dividend investing, growth at reasonable price, portfolio strategy
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Introduction:

In my recent article, "The Common Man Portfolio: Keeping Things Simple," I shared my personal Dividend Growth portfolio with readers, to demonstrate the way that dividends can grow over time. Here is a link to that article.

One of the criticisms of Dividend Growth investing centers around the notion that DG stocks suspended, reduced, or eliminated their dividends during the market melt-down in 2008. Nothing can be further from the truth--or be a concept that critics can't seem to let go.

While there are companies that did in fact suspend, reduce, and in some cases eliminate their dividends in 2008, there were also companies that did so in 2009, 2010, 2011, and 2012.

I don't think that any DG investor would try to dispute this reality. As a matter of record, David Fish provides a list of stocks that DG investors refer to as Dividend Champions, Contenders, and Challengers. In his monthly update of that report, he also includes the historical record of companies that have dropped off the list of DG stocks. Here is a link to David's site.

Keep in mind, while you review the CCC stock lists, that there is a qualifier for any stock to be considered a Dividend Growth stock. The qualifier is this. The company has to have increased its dividend on an annual basis for at least 5 years in a row.

If the stock does not meet that criteria, it is not a DG stock. It's a stock that pays a dividend. The two are not the same.

What I Know:

There are many other misconceptions about DG investing. One of the most common is the notion that DG investors are not concerned about "total return." As a DG investor, I have to admit that I am less concerned about total return and am more concerned about increasing my income stream from dividends. But this does not mean that I ignore total return. Quite the contrary.

A definition that I like to use, in regard to "total return" is:

The actual rate of return of an investment or a pool of investments, over a given period of time. Total return includes interest, capital gains, dividends, and distributions realized over that same period of time.

So total return is just that. The total return for an investment over time, including all the ancillary components that come with the investment, over and above just the change in price from one period to the next. Here is how my "Common Man" portfolio looks, in terms of total return numbers:

(click to enlarge)

What You Should Know:

While these numbers have been provided through my Schwab account stock screen, the total return numbers are representative of the actual total returns for 1, 3, and 5 year periods of time.

But these returns while interesting on their own, are meaningless as they relate to my own actual portfolio performance. You see, I have purchased these stocks over different periods of time. I have purchased shares, sold shares, reinvested shares and my own personal total return is different that the "average" total returns and that is an important distinction.

When a critic says something like, "Well, in the last 12 months, the total return on Walgreen (NYSE:WAG) has been a puny 1.12%!" they are ignoring a very important component of the definition of total return.

They are ignoring the reality that each of us has a different total return number for every stock in our portfolios, depending on what price you paid for your shares; the dividends that you reinvested and the price at which those dividends were reinvested; and any trades that you might have made, either purchases or sales.

Total return is specific to your own portfolio and your own history of ownership of a particular stock.

Some Things To Consider:

Just because a company's stock is a Dividend Growth stock, does not mean that an investor is not going to achieve a worthy total return on his investment.

There is no doubt in my mind, however, that the first concern that I have when I evaluate my portfolio is the dividend growth rate and how that has been changing over time. Again, let's not be in denial. The purpose and goal of the DG strategy is enhancement of income first and total return second. I don't know why that is such a seemingly hard concept to grasp.

Let's face it. Unless I am willing to sell one of these holdings, the "total return" number is nothing more or less than a paper gain. It is unrealized until I chose to sell. Since I am not a trader, my selling comes mostly in the form of portfolio rebalancing and not from a pure gain point of view.

Let's take a closer look at Walgreen for the point of illustration. In the last year, the total return for WAG has been 1.12%. Not exactly anything to get excited about, right? But, I haven't owned WAG for a year. I just purchased it in July of this year. My total return thus far is 20.92% having received a dividend distribution on 9/12 which was reinvested into additional shares at a reinvestment price of $35.47 per share.

Does that mean that I am a better investor than someone who has held WAG for 12 months? No. The meaning is relatively unimportant unless I chose to sell and take my 20.92% profit (from the growth in the price I paid to the price today and that dividend reinvestment activity that took place on 9/12).

But why would I do that? My yield for WAG is 3.7% based on the price I paid in July. The current price of WAG yields 3.1%. I purchased WAG because I thought that at the price I paid, $29.70 that it represented a value. It is a Dividend Champion and it gives me an additional holding in retail.

Conclusions and Summary:

As a Dividend Growth investor my rules are:

1. I want to identify companies that have paid and have been increasing their dividends for at least 5 years in a row. A company that is growing their dividend annually for at least this 5 year period, is a DG stock. Anything else is just a stock that pays a dividend.

2. I want to purchase companies that are priced at a value to their intrinsic worth. If a DG stock is "overvalued" I am not a buyer, plain and simple. How do we know if a stock is "overvalued?" For me, I use P/E as my main criteria. As confirmation, I use FAST Graphs.

3. I will consider selling stock in a company if the company has failed to increase the dividend, has cut the dividend, or has eliminated the dividend.

4. I will consider selling a stock when there appears to be a better opportunity to increase my income stream and reduce risk. I will also consider selling a stock once the fundamentals of that company no longer meet my investment criteria.

5. I will rebalance my portfolio on at least an annual basis. I will take profits off the table by bringing the holdings within the portfolio back into a relative balance with the other holdings.

6. I believe that "Total Return" is a metric that I will use to evaluate the performance of individual holdings within my portfolio. However, total return is not a primary driver in my decision to sell or hold a particular stock. All total return is, to me, is a snapshot of how an individual stock has performed over a particular point in time relative to the other holding within my portfolio.

Let's never forget why we are at the dance and who we came with. That is not to say that another form of investing is not a good one. What it is saying, and something that I have been harping on very much lately, is that you have got to have an objective in place that answers "why" you are investing. Next, you need to create a strategy that will give you the best chance to achieve your objective.

For me, my goal is to create an income stream that will provide for my retirement years, without forcing me to sell my investments, in order to live. Instead, I want to increase that income stream in the most prudent method that I can, minimizing risk and maximizing income.

Everything that I do within my portfolio has the first goal of increasing that income stream, not only through DG stock ownership, but also by careful management of the portfolio and changes to individual positions within that portfolio.

Source: The Common Man Portfolio And Total Return