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Momentum And Dividend Investings Are NOT Compatible: Illustrative Comment To Chowder's Blogpost “Market Strategies - Rules Of The Game”

2/28/2013

Chowder and me argued in comments to the blogpost "Market Strategies - Rules Of The Game" (seekingalpha.com/instablog/728729-chowde...) about role of momentum investing MI for a dividend investor Di. Let me illustrate why I think that MI is not compatible with dividend investing DI using the simple picture below.

(click to enlarge)Click to enlarge

Let consider two Di (Di1 and Di2) who agreed at time T0 that a stock of ABC is attractive at the same price P below the price ABC had at T0. Di2 worry about positive momentum in contrast to Di1. Hence Di1 bought ABC at P@T1 during negative momentum while Di2 did afraid "a failing knife" and waited until positive momentum established. In the result Di2 bought ABC at the same price as Di1 but later i.e. at P@T2.

ABC paid regular constant dividends during T2-T1 period. Therefore although Di1 and Di2 have the same yield on cost YoC their incomes during the T2-T1 period are different. In the sake of simplicity assume that T2-T1 = 1 year, Di2 hold money during this period in a saving account and ABC is a safest blue-chip company (safe as a bank account), the difference is (YoC - interest rate IR). So Di1 is a winner if YoC>IR and Di2 is a winner if YoC<IR.

I'd not buy the safest blue-chip company stock if YoC<IR, so MI is irrelevant for me as an eclectic Di.