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SDS (Seductive Dividend Stocks)
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Sorry I hide my true identity but I'm a physicist/engineer, native contrarian and idea generator. I am an eclectic dividend investor with motto "In God We Trust, All Others Pay Cash" applied to companies I invest in. I like to read /and read a lot - did you look on my SA photo 8-)? /... More
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  • A Fool And Free Money (27 Feb 2012) 8 comments
    Mar 29, 2012 12:51 AM

    When I was a child my parents told me a fairytale about a funny land over the horizon. In this land a fool plants small amounts of money into the soil and hopes that money trees grow producing big harvests of free money.
    When I was young I was foolish enough to want to move to the funny land over the horizon where the money trees grew, naively believing that I could find these wonderful money trees and plant them in my own orchard.
    Strangely, some aborigines of this land heard about money trees and a small fraction of them even tried to plant their money on these trees. But it seems that even the most enthusiastic planters did not fully trust the fairytale and lowered their expectations to only grow only 10% of their money on the wonderful money trees (see footnote 1).
    Initially I thought that this made sense, and I joined the community of planters and attempted to seed the trees with small but growing money fruits.
    Then recently I told my young four-year-old son the fairytale about a funny land over the horizon with free money on the trees. He asked me: "Dad - will I find such trees?" I said "Sure and I'll help you."
    When I had excess money not needed for my sons "toys and candies" (see footnote 2) I started to invest my own money (mostly in mutual funds). However, it took me several years of intensive reading of finance literature and independent thinking (footnote 3) about stocks to prepare and become ready to help my son who is a bit older than 4 now. Now I am older and wiser as well and I feel it's time to suggest to my son that he not trust his hard-earned money to so-called certified financial pundits who I am convinced do not know any more about stocks and finance than I now do.
    Let's quit fiction now and move on to the real world of finance and look at dividend paying stocks that I believe may be the closest thing to the fairy tale free money trees that exist in the real world. Here is a simple 7-step instruction how to plant real free money trees, better known as dividend growth stocks.
    1) Diligently and methodically save a portion of your money (earnings)
    2) Select solid companies with growing dividends and earnings
    3) Plant a whole orchard, i.e. invest 3% or less of your money into any single company-in other words diversify (see footnote 4)
    4) Hold until the price of any company's stock increases at least twofold (see footnote 5)
    e) Sell half of any stock with 100% or higher gain
    f) Enjoy the free money (dividends on zero cost) that grow on your free money trees (dividend growth stocks)
    g) Always plant new trees in the spring (bear market) and harvest trees in the autumn (bull market)
    Since I was wise enough to start young, some of my money trees (dividend growth stocks) are already bearing fruit (increasing dividends). Hopefully, my son will soon have his own orchard full of free money trees (dividend growth stocks) bearing succulent fruits (growing dividends). Hopefully, my little story of the free money trees will inspire some of you to plant your own money tree orchards. However, never forget that not all money trees bear fruit (sometimes you can lose your money), so be wise and diversify.

    The author is grateful to Chuck Carnevale for proofreading.


    1. These aborigines call the ripening fruit on the money trees growing dividends or yield on cost (YOC = increasing dividends/initial stock price) but some aborigines are so funny that they still endlessly debate current yield over yield on cost (see
    2. When I came to the funny land over the horizon (the zany world of finance) my knowledge about real world economics, finance and the stock market was the same as a newborn baby. I grew up quickly, studied hard, and after 4 years of my life in the funny land of finance,I applied my learned skills and started to invest.
    3. Bertrand Russell, a famous British philosopher, logician, mathematician, historian, and social critic, might have been thinking about finance pundits when he wrote "Most people would rather die than think".
    4. About 3% of Dividend growth stocks cut their dividends - see - see so be prepared that some of your money trees maybe lemons.
    5. I assume zero inflation and broker fees. For taxable accounts more than 2X price appreciation is needed.

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Comments (8)
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  • Kiisu Buraun
    , contributor
    Comments (562) | Send Message
    I like the fable.


    My former neighbor (the CEO of his own company as well as a multi-millionaire) had a similar policy... buy the right company, sell half when the purchase doubles; collect the dividends on the retained portion and repeat.


    Unlike others, I did not learn the proper financial lessons at my parents' knee. As a result I had to "unlearn" a lot, before I could progress in a sensible direction.
    29 Feb 2012, 01:44 AM Reply Like
  • greenmachine33
    , contributor
    Comments (43) | Send Message
    Laughing, good fable. It seemed set up at the beginning for the lemon comment.


    The general outlines of your strategy agree with my price valuation models. You might include, what I think you implied, that this strategy assumes regular savings and purchases. This will tend to dollar cost average to result in better blended YOC, combined with some spring planting as you said.


    My models show that relative returns are very sensitive to YOC. Certainly growth rate is a factor, but practical changes in YOC that you see every day can easily overwhelm growth. You address that by a general statement plant in the spring and sell when it doubles.


    Have you refined this into rules and back-tested it for a longish period (hopefully 20-30 yrs)?
    28 Apr 2012, 08:53 PM Reply Like
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (4045) | Send Message
    Author’s reply » I don't know a free back-tester.
    In long run (1926-2006) average annual return for S&P500 was 10.4%: about 5% came from dividends, 5.1% from their grow and 0.3% from P/E changes. The only factor I can control is initial yield....
    28 Apr 2012, 09:17 PM Reply Like
  • greenmachine33
    , contributor
    Comments (43) | Send Message
    I am going to check with Interactive Brokers if they will sell me historical data. They do have quite a few data products I haven't used any yet.
    29 Apr 2012, 05:00 PM Reply Like
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (4045) | Send Message
    Author’s reply » As far as I know there are only few good databases like COMPUSTAT and I think they are too expensive. You need to decide that you'll do with database and how much time you can spend for programming to convert data to information.
    29 Apr 2012, 08:28 PM Reply Like
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (4045) | Send Message
    Author’s reply » I'm reading "Warren Buffett SPEAKS" by Janet Lowe. The following quote seem funny:
    Buffett says, you can follow Will Rogers. Rogers said
    to study the markets carefully before buying a stock;
    then, “When the stock doubles, sell it.” What if the stock
    doesn’ t double? “If it doesn’t double, don’t buy it.”
    17 Oct 2012, 12:34 AM Reply Like
  • Smallstep
    , contributor
    Comments (1346) | Send Message
    Great fable, feel fun and got educated at the same time. Thanks for the wise advice, especially those 7 steps. One thing I cannot believe is, you are a young one. Admire your knowledge and experiences. I noticed your comments just recently. I feel so lucky to find you. Keep writing, please. -----Small
    10 Nov 2012, 11:04 PM Reply Like
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (4045) | Send Message
    Author’s reply » Thank you, Smallstep for kind words.
    12 Nov 2012, 01:04 AM Reply Like
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