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Old Trader is a 63 year old private investor, managing a retirement portfolio constructed to a) generate a high current yield, b) preserve capital, and c) increase capital. His methodology involves taking a "top down" macro view to identify favorable trends, and then engage in... More
  • The Pros and Cons of Dividend Reinvestment 8 comments
    Oct 22, 2010 11:01 PM | about stocks: O

     

    Let me start out by saying that the market currently has me as nervous as a long-tailed cat in a room full of rocking chairs. Since I’m not yet retired, nor have any imminent plans to do so, my holdings are set for automatic reinvestment of dividends. But as the market has continued to climb, many of my holdings are, in my opinion, fully valued. One holding, Realty Income, is arguably even somewhat overvalued.

     

    One of the benefits to reinvesting dividends is that it allows an investor to put at least one aspect of managing a portfolio on autopilot, so to speak. Conventional wisdom suggests that, given the long term trend for equities to go up in price, reinvesting dividends results in de facto dollar cost averaging. At a high share price, a dollar of dividends buys fewer shares, and vice versa.

     

    Now, however, I find myself wondering if, in keeping all of my positions set to reinvest, I’m not making the mistake of “buying high”. I’m not suggesting “flipping” from reinvestment to taking dividends in cash to attempt to take advantage of a relatively short-lived 5-10% correction, and then back again. While I suppose that sort of timing is at least theoretically possible, the amount of work (and/or luck) needed would hardly be worth the effort.

     

    On the other hand, if an investor feels that a longer term erosion in stock prices lays ahead, for whatever reason, it would make sense to start letting dividends accumulate as cash for deployment at more reasonable valuations to open new positions, to augment current ones, or some combination of both.

     

    Like many, if not most investors, I keep a watch list of stocks, and normally, when I exit a position, or take some money off of the table and do some trimming of a position, I already know where that cash will be deployed. At present, however, just about everything on my list is also at least fairly valued, so it makes little sense to trade one fully valued position for another. One downside to switching over to accumulating cash is the fact that the current return is laughingly miniscule. Going back to the example I mentioned earlier, Realty Income is paying 4.87%. That’s certainly a far cry from the 6+% it paid earlier in the year, but compare 4.87% to what the average money market fund pays!

     

    In summation, under current market conditions, I’m becoming increasingly of the mind that it might be wiser to be taking the cash.




    Disclosure: Long: O
    Themes: Dividend Reinvestment Stocks: O
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Comments (8)
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  • Ricard
    , contributor
    Comments (3829) | Send Message
     
    Old Trader,

     

    Thanks for sharing, this was a good read. My unsolicited opinion (haha) is to think of it as dollar cost averaging. I'm not sure if this was your original intent through DRIP. Regardless, it's hard to know what to do in today's market. This cat's been 'rocked' a couple times this year already.

     

    Myself, it all goes to cash. Part of it is laziness (I don't know how to set up a DRIP for my accounts) and another part is just me feeling comfortable with realized gains. Dividend yielding stocks are also relatively new for me - the past decade saw me engaging almost exclusively in the battered tech sector.

     

    Cheers, good luck with your investments :)
    23 Oct 2010, 12:30 AM Reply Like
  • Old Trader
    , contributor
    Comments (5726) | Send Message
     
    Author’s reply » Ricard,

     

    Thanks for "dropping by". As far as setting up DRIPs, both of my IRAs (Fidelity and Ameritrade) allow setting up auto reinvestment of dividends, capital distributions, etc. With Fidelity, its easily done online. Amertrade requires a phone call.

     

    There IS something to be said for the comforting feel of cold, hard cash in hand, LOL.
    23 Oct 2010, 01:31 AM Reply Like
  • Sarah Belle
    , contributor
    Comments (39) | Send Message
     
    Ricard,

     

    How long have you been looking at dividend stocks? I think that I "should" be dong that, but haven't really started to do so. That's why I'm here, looking for ideas.
    24 Oct 2010, 04:13 PM Reply Like
  • Ricard
    , contributor
    Comments (3829) | Send Message
     
    Not too long. It was an extension of my tech buying - I felt like I needed some sort of anchor besides just money-losing 'deep value' companies with gobs of cash, so I went into INTC and CSCO. Intel has actually been and continues to be a very consistent and moderately growing dividend provider, and I have been extremely satisfied with it to that end. More recently I've switched my focus from tech to commodities, especially commodity stocks, some of which provide 2-3% dividends. I own XOM and ECA, and the dividends have been modest. It's just a bonus to my main goal - capital appreciation.

     

    To me, it's more just a part of the overall investment calculus than anything innately special about the cash payout. Most of the high-flying dividend yielders in recent times have proven to be enormous duds, especially REITs and financials - I would advise not placing any special status to the fact that a company is throwing out cash versus just making good money. I would much rather be able to trust the balance sheets of the companies I deal with - this is preferable than just looking at cash payout.

     

    I'm generally suspicious of the popular income stocks, especially 'high quality' US companies like PG and WMT. These companies are reliant upon emerging markets for their growth, and personally I see a possible risk in that most analysts do not even doubt that US multinationals will be able to sustain growth in emerging markets going forward. I see a possible loss of luster in the reputation of the US after this crisis plays itself out. For example, a couple of years ago, I took a vacation in Japan and noticed that a double cheeseburger meal, with a kid-sized drink and small fries, cost a bit over $6 (when the yen was at 110 - it's probably even more now) - this when a filling meal of sushi cost about $5, and a full blown extra-large Big Mac meal in America cost about $5. I also remember a Big Mac meal in China (I was in the area) was well above the cost of similarly filling local fare. That's a premium I see going away, at least in emerging markets, and quality earnings growth along with it. Most people in America do not realize how much of a love/hate relationship exists outside its borders.

     

    For a framework on how to think about dividends, I'd recommend Ben Graham's books "The Intelligent Investor" and "Security Analysis" - you can just read the chapters you're interested in to get started, although I'd recommend at least reading the first book cover to determine how much time you're willing to put into this business.

     

    Cheers, good luck with your investments.
    24 Oct 2010, 04:41 PM Reply Like
  • Old Trader
    , contributor
    Comments (5726) | Send Message
     
    Author’s reply » Sarah Belle,

     

    There's quite a few contributors/commentors on SA who do an EXCELLENT job in writing on the topic. Btw, you beat me to the punch with your question to Ricard as to how long he's incorporated dividend investing into his investing equation.
    24 Oct 2010, 05:30 PM Reply Like
  • Old Trader
    , contributor
    Comments (5726) | Send Message
     
    Author’s reply » Ricard,

     

    A GREAT response to Sarah Belle, as to some good sources for info on how to view dividends. I appreciate your input as to what you've seen in your travels....a "boots on the ground" viewpoint is always important, imo.

     

    Although I have yet to pull the trigger, INTC has been on my watch list for quite a while. For basically the same reasons, TSM is on it, too.
    24 Oct 2010, 05:33 PM Reply Like
  • Ricard
    , contributor
    Comments (3829) | Send Message
     
    Thanks Old Trader. Yeah, there are certainly a lot of posters who track dividend investing much more closely than I do. I follow 'dividends4life' and 'dividend growth investor' for that specific reason.

     

    I guess the bottom line is that in Ben Graham's time (especially when he wrote Security Analysis), there was little way to verify whether or not a company had liquidity issues, so the consistency of the dividend payout was seen as proof that the company had cash on hand to do so. Today, we have statements of cash flow, so it's generally much easier to detect these types of problems. That would go far in explaining why aggregate dividend yields have declined so much over the past 100 years. Even Ben Graham admitted it wasn't a perfect science.

     

    You know after thinking about it, I just might set my longer term holds into DRIPs. I also have a fidelity account...I didn't know it was that easy, lol.
    24 Oct 2010, 07:26 PM Reply Like
  • Old Trader
    , contributor
    Comments (5726) | Send Message
     
    Author’s reply » Ricard,

     

    Those are 2 of the folks that I was referring to. While I don't "follow" either, I read their stuff more often than not.

     

    If your account is an IRA, after you log in and get to "positions":, there should be a tab along the left side of the page labeled "Update Accounts/Features". I'm not certain if its the same for a non-IRA account, but would think so.
    24 Oct 2010, 07:38 PM Reply Like
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