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Dividend Growth Machine

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  • A Constructive Critique Of Dividend Growth Investing [View article]
    I consider the fact that DGI reduces the space of investing possibilities to be an advantage, not a flaw. It allows one to weed out a lot of undesirable companies (i.e., companies that are undesirable from most investing perspectives, not just DGI) and focus on companies that are more likely to be suitable candidates for investment.

    Moreover, the remaining space is still quite large: 463 companies are on the Dividend CCC List, 33 others have almost reached Challenger status, and another 39 are "frozen angels" that had temporary dividend freezes but have since resumed their dividend growth. That's a total of 535 companies, so there are plenty of stocks from which to choose.

    Granted, a strict adherence to DGI would result in the exclusion of many high-quality small- and mid-cap companies that do not pay dividends. However, a strict adherence to *any* investing approach would exclude some companies. For example, someone who passively invests in an S&P 500 index fund is, in effect, excluding many small- and mid-cap companies.

    Regarding the emphasis given to total return, this will vary among investors, but I think most do give some consideration to it. The key point is that total return is not viewed as the primary goal of all DG investors. Speaking for myself, my primary goal is to create a sustainable, rising stream of dividend income. My *secondary* goal is to achieve a satisfactory total return. These goals are not mutually exclusive.

    Regarding preservation of capital, I view the DGI approach as applying to investment in stocks; it does not exclude investment in other entities such as bonds, gold, real estate, etc. For example, people can follow DGI for their stocks but still have bonds in their portfolios, especially whenever bonds happen to be attractive investments. To balance risk they can differentially weight the various parts of their portfolios.

    You find it "odd that some DG investors seemingly root for a stock they already own to drop in price to a yield they would want to buy it at, with little consideration to fundamental analysis or lost capital."

    I don't know of any serious DG investor who would not consider the fundamentals of a stock before buying it at a lower price. Indeed, the "monitor" part of the buy-and-monitor aspect of DGI involves monitoring a company's fundamentals, even when one is not necessarily looking to buy more of its stock in the near future.

    As for lost capital, you only realize the loss when you sell. If you've invested in a high-quality company and its stock has taken a beating, then you can patiently ride out the unrealized capital loss until the stock recovers. This would be a suitable approach for young investors, but not necessarily for retirees who take distributions by selling stocks rather than relying solely on dividend income. In the latter situation, capital preservation is clearly of high importance. However, some might argue that a retiree who lives mainly off selling stocks is not much of a DG investor in the first place.

    Rooting for a stock to go down does not equate with desiring a capital loss. For example, I have sizable capital gains on most of the stocks in my portfolio. If I wanted to add to one of those positions, then I would hope for a dip simply so I could get a better price for my additional shares. Regardless of one's investing approach, one should always strive to buy low at an attractive valuation.

    I will conclude by noting that different DG investors implement the approach in different ways. Not all invest exclusively in DG stocks for their entire portfolio. For example, several people here at SA have mentioned that they have a core portfolio of DG stocks, then a separate portfolio for, say, growth stocks or speculative opportunities. Others have mentioned that they have bond holdings alongside their DG stocks. Thus, as with any investing approach, there is variation in how self-proclaimed DG investors follow the approach.
    Apr 5 08:27 PM | 33 Likes Like |Link to Comment
  • 'Buying Dividend Stocks For Income' Arguments Don't Make Sense [View article]
    Here is the logic of my approach to dividend investing:

    I look at a company like JNJ, which is currently yielding about 3.5%. Perhaps in a month the overall market (including JNJ) will drop, boosting the yield closer to 4.0% (yes, I am well aware that the higher yield is due to a lower price -- there is no confusion about arithmetic). Now I can buy JNJ at a lower price than before while getting a higher % dividend return on my initial investment.

    I consider JNJ to be a pretty solid company, so when the market rebounds, JNJ will likely rebound too, so I would see unrealized capital gains on top of my cash dividend return. But you might object that economic forecasts are weak and growth may be slow, so there is a risk of a dividend cut. That seems highly unlikely with a company like JNJ. Its payout ratio is a reasonable 52%. It has increased its dividend every year for 49 consecutive years. Even in the recent (ongoing?) recession it has been increasing its dividend. The 10-year average annual dividend growth rate is 13%. The dividend appears quite safe.

    Now let's extrapolate into the future because I would be buying JNJ as a long-term investment to capitalize on its dividend growth. Assuming the 13% annual dividend growth rate, in 10 years my initial yield of 4.0% becomes a yield on cost of 13.6%. If we continue for another 10 years, the yield on cost becomes 46.1%. In other words, I would be getting a whopping 46% return from dividends alone. This is not even including the additional return I would get from reinvesting dividends.

    What about capital gains if I ever wanted to sell the stock? Well, in order to have that kind of dividend growth, you need to have earnings growth -- which is a major factor that drives stock prices higher. Going forward 20 years, I would not only be getting my very high dividend yield, but I would also likely be sitting on substantial unrealized capital gains.

    I don't really see anything wrong with this approach and, from what I have read (e.g., see The Single Best Investment by Lowell Miller), it seems to work extremely well. You might object that I've somehow cherry-picked JNJ as an example, but you could easily replace it with companies like ABT, KO, MCD, PG, T, etc., and get similar results.

    I am sure there are other dividend investors here who could add to what I've written and make an even stronger case for the logic of the approach I've outlined.
    Aug 31 01:03 PM | 28 Likes Like |Link to Comment
  • Is Dividend Growth Investing Enthusiasm Inflating A Bubble? [View article]
    The author of this article seems to assume that dividend growth investors ignore valuation. That assumption is false -- or, at the very least, it does not hold for all investors.

    The author writes that "some dividend-focused indexes like the S&P Dividend Aristocrats sit at or near all-time highs," evidently missing the fact that the major stock indices in general are near all-time highs, so I would be hesitant to single out dividend growth stocks.

    Many dividend growth stocks are what I would call "fully valued" right now, but the only real dividend "bubble" I am seeing is the excessive number of articles published about dividend bubbles.
    Aug 24 09:22 AM | 26 Likes Like |Link to Comment
  • Why Dividend Growth Investors View Stocks Differently [View article]
    I think Clint Eastwood said it best in his movie Dividend Harry:

    "I know what you're thinking. 'Did he get six dividends or only five?' Well, to tell you the truth, in all this excitement I kind of lost track myself. But being as this is a dividend growth stock, the most powerful stock in the market, and would blow your penny stock away, you've got to ask yourself one question: Do I want cash? Well, do ya, punk?"
    May 8 01:35 PM | 26 Likes Like |Link to Comment
  • Beware The False God Of The Dividend [View article]
    If dividends are meaningless to net worth, represent nothing but market risk, and play no part in profitability, then I guess investors had better sell all their dividend stocks because they will not make them money. Break free from the wrath of this false god! Please sell all the stocks on my watch list, driving up that useless and misunderstood metric called dividend yield. Don't worry, there will be many foolish buyers of those stocks -- I'll be one of them. ;)
    Nov 6 08:39 AM | 19 Likes Like |Link to Comment
  • The Dumb Dividend Idea [View article]
    "The concept of dividend-stock investing is almost worthless"

    No, what's worthless is this article.
    Sep 26 06:22 PM | 17 Likes Like |Link to Comment
  • Are Dividend Growth Investors Doing It All Wrong? [View article]
    This is a misleading article, to put it mildly.

    "Dividend growth investors generally ignore entire sectors, such as REITs, financials, industrials, and technology."

    Stocks included in my dividend growth portfolio:

    Industrials: CMI, CNI, GD, ITW, NSC, UNP, UTX
    Technology: INTC, MSFT

    I do not own any banks or insurance companies in the financial sector because I find it difficult to evaluate their risks. If the author were to look at several of the dividend growth portfolios written about on Seeking Alpha, he might discover the inaccuracy of his generalizations.

    "If you're an investor looking for dividend names, look beyond the 20 or so that have increased dividends for 25 years."

    The last time I checked, the Dividend Champions list included 105 stocks. Let's not forget the 211 Dividend Contenders and 155 Dividend Challengers.

    "I have two major problems with dividend growth investing, and that's the concentration of dividend growth dollars into only a handful of different names and sectors, and the dividend yield having more importance than the underlying value of the security. Let's address them individually."

    Regarding problem #1: My portfolio currently consists of 35 stocks spread out among consumer staples, consumer discretionary, energy, healthcare, industrials, REITs, and technology. That's a fairly diversified mix of stocks and I know several other dividend growth investors who are similarly diversified.

    Regarding problem #2: I wonder whether it is the author who is running the risk of chasing yield without considering the "undervaluing value of the security," which is never actually addressed in the article.
    Dec 13 07:13 PM | 16 Likes Like |Link to Comment
  • Omega Healthcare Is A Sleep-Well-At-Night REIT That Pays 6.27% [View article]
    I think it's important to break down the concept of "risk" into different categories:

    1. Valuation and the risk of paying too much for a stock. A stock with a margin of safety (i.e., a stock price that is below the company's intrinsic value) is typically a lower-risk investment than a stock without a margin of safety. Based on this article, OHI appears to be trading at fair value, so one could say its valuation-based risk is neutral (not a bargain, but not overpriced either).

    2. Risk associated with the quality of a company and its assets. Brad mentioned in his previous article and in his comments here that OHI owns some lower-quality credit assets (e.g., non-investment grade properties), raising its risk profile.

    3. Risk from lack of business diversity. OHI is a "pure play" REIT that focuses on skilled nursing facilities. Should there be a major event (e.g., a federal policy change) that negatively affects that healthcare segment, then OHI would likely suffer more than healthcare REITs that focus on other segments.

    I think one needs to consider this variety of risk factors when judging whether a REIT such as OHI qualifies as a "sleep well at night" holding.
    Aug 5 09:40 AM | 15 Likes Like |Link to Comment
  • Preparing For Coca-Cola's Split [View article]
    Maybe I misunderstand your reasoning, but as far as I know, a stock split does not save a company any money on dividends. Even though the nominal dividend amount is halved, the number of shares on which the dividend is paid is doubled, so the net effect is no change in the dividend payment. If KO were to increase its dividend by 8.5% next year, then it would be paying 8.5% more in dividends regardless of whether the stock split occurred.
    Aug 9 06:18 PM | 14 Likes Like |Link to Comment
  • Why Averaging Down Is A Bad Investment Strategy [View article]
    If a company has good fundamentals and solid long-term prospects, but the market (for whatever reason) has pushed the stock into undervalued territory, then it is sensible to average down and lower your cost basis, at least from a long-term investing perspective. I do not consider this to be irrational exuberance, which applies to people buying overvalued stocks based on hype and ignoring fundamentals.
    Jul 12 11:55 AM | 14 Likes Like |Link to Comment
  • Beware Phantom Dividend Cuts [View article]
    The accelerated dividends also complicate some year-over-year dividend comparisons in my portfolio. Congress sure likes to mess things up! Fortunately, we have folks like you who keep on top of these matters. Thanks for this awareness message and for your continued work on the Dividend CCC Lists.
    Dec 10 08:04 AM | 13 Likes Like |Link to Comment
  • Does Entry Point Matter To A Dividend Growth Investor? [View article]
    This case study nicely illustrates the impact of valuation on long-term returns. Thanks for writing it.

    I like to think of my own investing style as value-oriented dividend growth investing: I look to buy dividend growth stocks when they are available at attractive valuations (at or below my judgment of fair value). This approach gives me two ways to generate long-term returns: (a) income from a growing dividend and (b) capital gains from the market eventually pricing the stock closer to its intrinsic value. Both the dividend and the initial undervaluation also provide a margin of safety for capital preservation. As far as I'm concerned, it is one of the most sensible ways to invest.
    Oct 12 06:06 PM | 13 Likes Like |Link to Comment
  • Proposed Dividend Tax Is As Uninformed As It Is Naive [View article]
    Let me start by noting that I am against the proposed dividend tax increase. I agree that it will have some negative consequences, but I think one needs to keep in mind the following considerations:

    - The dividend increase applies to individuals with gross incomes over $200,000 or couples with joint incomes over $250,000. Most small-time investors have much lower incomes, so their dividends will not be subject to the higher tax rate.

    - Many retirees have their dividend-paying stocks in tax-advantaged accounts such as IRAs, so a change in the dividend tax rate would have no effect on dividends accumulated in those accounts. I think the same point applies to other accounts such as pension plans.

    - Many companies have paid dividends (and increased their dividends) for decades, during times when the dividend tax rate was much higher than it is now. I doubt that a company such as Coca-Cola, which has increased its dividend for 50 consecutive years, will stop increasing or paying it just because the dividend tax rate goes up.

    - If many companies did stop paying dividends, then what would they do with the money? Spend it on share buybacks, which are often made at inopportune times? Spend it on higher executive compensation? Spend it on needless acquisitions? Consistent dividend payments help to keep managements in check.

    - If a dividend tax increase does lead to a sell-off of dividend-paying stocks, then that might actually be beneficial for young people in the accumulation phase of their investing because they would be able to buy stocks with higher yields. Of course, this is assuming that companies keep paying and increasing their dividends, which I think is likely among established blue-chip dividend payers.

    Thus, while I don't like the prospect of increased dividend taxation, I think the doom-and-gloom scenarios outlined in some articles are a bit extreme.
    Mar 1 11:33 AM | 13 Likes Like |Link to Comment
  • A Real Dividend Growth Machine: 2013 Review [View article]
    peterad: That's a joke, right? :)
    Jan 14 09:10 PM | 12 Likes Like |Link to Comment
  • What Stocks Are Most Commonly Held By Dividend Growth Investors? [View article]
    I had some free time and compiled a list of stocks from public dividend growth portfolios found on either Seeking Alpha or blogs. Here are some results:

    Number of portfolios: 26
    Average number of stocks per portfolio: 23 (min. 5, max. 51)
    Number of unique stocks: 201

    Here is a list of the 24 most popular stocks, with the number indicating how many portfolios hold the stock:

    18 INTC
    17 JNJ
    17 MCD
    15 CVX
    15 KO
    13 PG
    13 T
    12 NSC
    11 AFL
    10 COP
    10 KMI
    10 PEP
    10 PM
    9 LO
    9 VOD
    8 LMT
    8 MO
    8 MSFT
    7 EMR
    7 KMB
    7 MDT
    7 WAG
    7 WFC
    7 WMT
    all others were held in 6 or fewer portfolios
    Apr 17 09:30 PM | 12 Likes Like |Link to Comment