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chowder
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My primary objective is income replacement! ... The objective is to start earning an income stream now, to replace the income that will be earned throughout the working years. I want that income to be reliable, predictable and increasing. The income stream will need to continue to grow to stay... More
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  • Dividend Growth Investing - Getting Your Mind Right 22 comments
    Feb 13, 2013 12:12 AM

    Over the years I have experimented with many various investment strategies. Some worked out better than others. In the beginning I used to buy companies that held the most "Buy" recommendations by analysts. You can guess how that played out.

    The next step was to monitor the top performing mutual funds and then buy the companies that were most common in each fund.

    I tried the penny stocks and the pink sheets. I tried buying low dollar companies, companies whose share price was between $5 and $10, thinking they would show the most gain because after all, a dollar move on a $5 stock represents a 20% return.

    That was probably my most stupid idea! A $5 stock isn't going to show a 20% return any easier than a $100 stock. A 20% return is a 20% return. It's just as easy for a $100 stock to grow $20 as it is a $5 stock to grow $1. It's all relative. It's surprising how many people can't relate to that. I know I didn't at the time.

    It was then time to graduate to CNBC, Cramer and Fast Money. ... Ha! Ha!

    At that point, I was gaining knowledge and experience. It was time to do something sophisticated and my mind was right for the challenge. I started to learn about CANSLIM and Investors Business Daily.

    I had more success with this system than any system I had used before, but I was still undisciplined and didn't have the skills for negotiating around market pull backs. I would see excellent gains disappear on me. I lacked selling skills.

    CANSLIM led me to technical analysis and I went forward ... full steam ahead. I can read a chart. I have a fairly good knowledge of technical analysis. I enjoyed several years of success swing trading on nothing more than technical analysis. I didn't even know what some of the companies I owned did. It didn't matter. I could identify high probability buy and sell points and that's what I did. Then came the Great Recession.

    I decided I would invert my chart patterns and short companies. Lord knows, they were ripe for shorting in 2008. I kept placing short orders and kept getting the response, "no shares available."

    You can't short if you can't borrow the shares and I wasn't a big enough player to be allowed to do naked shorts. I was now in a position where I couldn't earn a living in a market I knew I could make money at, if only I could short positions. I wasn't going to play hero and try to find a gem to go long on, in a down trending market, not for the short term anyway, and that's what swing trading is all about.

    I owned a couple of dividend paying companies that I didn't pay much attention to. I had opened up a few DRIP's a number of years ago, sold most of them off to play the tech boom of 2000, and then forget about DRIP's.

    It was in 2008 when I saw what D had been doing for years. I owned a DRIP in D. My sister had a DRIP in D and had it longer than me. It had outperformed everything up to that time.

    The light bulb went on. I saw blue chip companies offering historically high yields. Bingo! I'm in.

    It was at this time I was introduced to The Single Best Investment by a guy on Silicon Investor named Steve Felix. ... I now hit the lottery. Lowell Miller, the author of SBI taught me about dividend growth investing.

    The concepts and principles that I apply today to my investing, and share with others here, are a direct result of Lowell Miller's book. I highly recommend it.

    The thing I like most about dividend growth investing is that it is simple, it makes sense, it's easy to implement and it provides a high probability of succeeding over the long term.

    Dividend growth investing isn't about chasing a dream, it's about building the dream, one dividend check at a time. Dividend growth investing is about understanding that the key to wealth is investing a small amount of money, on a regular basis, over a long period of time.

    The longer you wait of course, the more money and/or risk you must take on. However, if dividend growth investing is to be implemented properly, it's about achieving long term financial goals with low risk and steady growth. ... Let me repeat that! ... LOW RISK and steady growth.

    Dividend growth investing is common sense investing. It is about being a partial owner of a real business, not a stock symbol on a computer screen. Common sense also means spreading out your risks, but not so much that you lose control of your portfolio. Some people can manage more positions than others. Find your comfort zone.

    When you become a dividend growth investor, you are no longer "playing the market." You don't have to guess or predict which sectors will perform the best going forward. Dividend growth investing is simply about buying ownership in an ongoing successful business, and if done correctly, you don't have to worry about market conditions.

    How do you employ dividend growth investing properly?

    I believe it starts with attitude, a certain mind set.

    In the world of sports, there are many successful ballplayers who can't coach. They don't have the right mind set. There are many coaches who weren't great ball players. They lacked ball playing skills, but they have the right mind set to coach others.

    Dividend growth investing takes a different mind set from what most of us are used to using. It starts with developing a plan you can stick with regardless of market activity. ... You did hear that, didn't you? ... A plan you can stick with! ... Your plan needs to allow you to stay firm in the face of adversity. It's okay to be nervous. It's not okay to panic.

    I have found that if I stick with companies that have the highest financial ratings, I'm able to withstand those 30% to 50% pullbacks when the market melts down. If the "A" rated companies are going down the tubes, so is everyone else. That's how I look at it.

    Once the market pulls back, at a certain point the "flight to quality" begins and that's why I own quality and stay invested in quality. "Flight" moves are powerful and fast. If you aren't in, the odds are saying, you'll miss it.

    When I look for high quality companies, based on financial ratings, I add additional safety insurance by owning companies that sell a product or service we must or will buy, regardless of economic conditions. These are called your necessity companies.

    How much of your portfolio should you assign to necessity companies?

    Lowell Miller says if you are properly diversified among 30-50 companies, then 50% of your holdings, if not more, should be devoted to necessity companies. He says if you only own 5 companies, they should all be utilities and REIT's.

    What is common sense investing?

    Common sense investing is about ownership, it's about being a partial owner in an ongoing, successful business. Sometimes there's a premium to pay for that quality.

    Common sense investing means that your strategy needs to be effective in all market conditions. Momentum investing works when the market is trending higher. Dividend growth investing works regardless of market conditions. Common sense investing requires owning companies who grow their dividends even in adverse times.

    Common sense investing isn't about hitting home runs, it's about accepting reasonable yields, reasonable dividend growth and a resonable share price. Common sense investing is about using the power of compounding to help your income stream grow.

    In closing, let me say that from my perspective, dividend growth investing isn't about worrying how you perform against the Market. Dividend growth investing is about building an income stream to meet expenses, support a life style and replace the income from your working years.

    Dividend growth investing is about building an income stream that is reliable, predictable and increasing.

    At some point in our investing careers, most of us are going to need to start drawing cash for expenses and other living conditions. Dividend growth investing allows you the opportunity to meet those distribution demands without selling off your assets.

    Since we're all going to need to draw that income eventually, why not do it right and do it from the start? Let's not put it off until we're near retirement and go through another learning curve. Let's do it now.

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Comments (22)
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  • Garthilk
    , contributor
    Comments (588) | Send Message
     
    Another great blog post. Thanks for putting this up. So far my first big mistake is not having started my retirement funding sooner. But it's great to see that so many of the tangent investing ideas that pop into my head are present in other people. I'm trying to stay focused on DGI and travel a well traveled path.
    13 Feb 2013, 12:50 AM Reply Like
  • panglin37075
    , contributor
    Comments (5) | Send Message
     
    I appreciate your messages chowder. Really gives me some hope considering all of my past failures with botched investment experimentation. I had all but given up to Dave Ramsey's method with mutual funds several years ago. DGI looks to be a long-term winner for me. And, BTW- I am having fun again, investing!
    13 Feb 2013, 01:47 AM Reply Like
  • Bob Wells
    , contributor
    Comments (5166) | Send Message
     
    Chowder...

     

    Another winner my friend. Nothing beats the simply stated truth.

     

    Bob
    13 Feb 2013, 07:20 AM Reply Like
  • Dennis Anderson
    , contributor
    Comments (348) | Send Message
     
    Chowder: the path I followed is very similar to yours except I was never into penny stocks and pink sheets. I think CANSLIM can be very profitable, but I was constantly reading charts looking for just the right combination of stock and pattern. Just curious, in 2008 why did you try only to short stocks and not buy puts or else keep your stock and sell covered calls? Unfortunately I didn't come to DG investing until late 2010. I still trade in a non-IRA account, but DG is my focus and foundation.
    13 Feb 2013, 09:30 AM Reply Like
  • chowder
    , contributor
    Comments (7289) | Send Message
     
    Author’s reply » clever, I'm not clever enough to use options. I never took the time to study them and I'm at the point in my life where I don't want to go through another learning curve.

     

    I have a couple of books on options and every time I start to read them, the desire just isn't there. So, I stick with simplicity and focus on what I know.
    13 Feb 2013, 02:40 PM Reply Like
  • Yield Hunter
    , contributor
    Comments (294) | Send Message
     
    Chowder, I know your policy on opening links, but you've already read the book- this is for your followers more than you. I just found this link this morning, and I had to share it! http://bit.ly/XzYRKQ

     

    mhinvest.com is Miller's website (you can google him to get there), but I couldn't find the pdf of the book on his site independently. I found it through http://bit.ly/15cetvf

     

    I just downloaded it, and my computer has not crashed. I cannot tell you what's going on behind the scenes, though. Also, I am at work. I don't think I would open it on my personal computer.
    13 Feb 2013, 10:01 AM Reply Like
  • Yield Hunter
    , contributor
    Comments (294) | Send Message
     
    Sorry, I put in the real link, but it automatically changed it to the miniURL. I personally get a little freaked out by these because you cannot see what you're actually clicking on.

     

    http://www.mhinvest.com files/pdf/ SBI_Single_Best _Investment_ Miller.pdf

     

    There, I put in some spaces so you can just drag the whole thing up to your address bar and delete the spaces.

     

    And the second link was
    forums.redflagdeals .com/single-best- investment- lowell-miller- free-pdf- 1286876/
    but it just has some guy posting that the aforementioned link was available on the mhinvest website.
    13 Feb 2013, 11:00 AM Reply Like
  • Yield Hunter
    , contributor
    Comments (294) | Send Message
     
    Ok, last post about this from me- my computer just finished running an AVG scan, which I commenced after having opened and saved the pdf to my desktop, virus free. Hooray!

     

    I mean, I guess if you trust me, you probably already clicked on the link, and if you don't then you won't believe this either! But I figured I'd share anyway.
    13 Feb 2013, 11:31 AM Reply Like
  • IgnisFatuus
    , contributor
    Comments (2115) | Send Message
     
    I just completed the D/L of SBI and it was virus free (or so Avast! says).
    Thank you so much.
    17 Feb 2013, 10:02 AM Reply Like
  • poundofbutter
    , contributor
    Comments (86) | Send Message
     
    Thanks for the link! A free copy of one of the greatest investment books of all time... WOW. What a steal. I really appreciate it.
    21 Feb 2013, 12:50 AM Reply Like
  • tuliptown
    , contributor
    Comments (777) | Send Message
     
    Chowder, I have taken a similar path. Maybe there needs to be a 12 step program for us reformed pink sheet and Canslim investors? "I was my own worst advisor for 15 years before I found DGI..."

     

    I find my biggest issue is a lack of imagination. I find stocks that appear to be great values only to watch them sink further down. Then I ride a stock up to what I think is fairy land value and sell, only to watch it take off for real. What attracts me to DGI is that you get paid now. Right now this quarter and every quarter. Then, if you hold on you get rewarded with higher dividends and likely some increased share price. No more full ride up and down with nothing to show but the stress marks. I get paid to be patient (lazy). I get paid if I don't sell the stock. I can sell it if something good comes along without regrets. Its a freedom I enjoy.

     

    Another convert
    t
    13 Feb 2013, 11:25 AM Reply Like
  • Yield Hunter
    , contributor
    Comments (294) | Send Message
     
    Are your returns better than they were when you were trading? My concern is that in order to properly DG, I need to contribute, and then over time, I would (hopefully) amass wealth. Indeed, I think it's a great plan. But without the capital to contribute, it won't provide with enough income to actually sustain itself. Whereas, my impression is that, assuming one can be successful at it, trading can act as an "income-earning job" in the sense that it can provide a source of income to then contribute in DG fashion.

     

    Am I being overzealous/ignorant/too hopeful?
    13 Feb 2013, 11:36 AM Reply Like
  • tuliptown
    , contributor
    Comments (777) | Send Message
     
    Yield Hunter, I can state that I have underperformed the market and would have been better off with an index fund until I started DGI.

     

    As always, your results may differ
    13 Feb 2013, 12:17 PM Reply Like
  • chowder
    , contributor
    Comments (7289) | Send Message
     
    Author’s reply » I was outperforming the S&P 500 Index when trading, but it took a lot of energy and time. I had a "pay for" full service charting service which cost me $100 per month, and I was looking at 5,000 charts per day. I'm not kidding.

     

    Over time I was able to recognize the exact patterns I was looking for and I was able to identify them quickly. Then as quickly as you can hit a key stroke, I could pull up another chart.

     

    It was easier in my earlier years because you entered the trade, set the stop, and looked for another setup. Then came high frequency trading and you couldn't set stops anymore. You had to baby sit your position. It was work. ... Ha!
    13 Feb 2013, 02:54 PM Reply Like
  • Jmclean907
    , contributor
    Comments (6) | Send Message
     
    Great article, It is nice to hear your evolution as a trader/investor. I have tried every investment philosophy and have come to the same conclusion as you. DGI is best for me.
    13 Feb 2013, 01:30 PM Reply Like
  • jantis
    , contributor
    Comments (5) | Send Message
     
    Great article, Chowder. I have to tell you I read it with a little chuckle. And believe me, not AT you, but I hope with you, and perhaps others as well. Not because its funny but because I can see many of my own experiences in there. I, too, have worked at other types of active trading, with success at times, but lots of struggles and failures as well. For me, just too much risk, too much emotion, and too much of the staring at charts and babysitting positions. Like I mentioned in a comment on your blog on weighting, I feel like I've hopped the fence to check out the other pasture. I am really intrigued by DGI and having a blast again learning a new "trade", no pun intended. Something about it all is just sitting right with me. To repeat what many others besides your self have said, it is common sense.

     

    Anyway, I have to relate an experience that comes to mind that is absolutely hilarious to me now, but to this day, was one of the craziest and scariest moments of my life. Also, a turning point. Remember the "flash crash" or "fat finger"? I was sitting at my computer at the office looking at charts, etc. when the market began that drop off the cliff. This, of course, all took place in a matter of minutes, but it seemed to happen a million miles an hour and in slow motion, if you know what I mean. I had all kinds of complex option spreads open in 3 different accounts. Iron condors, butterflies, diagonals, etc. At first, you sort of watch it and wonder if you're actually seeing things correctly. The market began to drop and my spreads started to go "haywire" literally. Volatility exploded, bid/asks went nuts, and I was basically trying to figure out if the market was literally going to crash and burn. At first I just froze, probably out of disbelief, then my next instinct was to panic and start closing spreads. Picture the 2 old guys in the old movie "Trading Places" screaming "sell, sell!" as the orange market was crashing. But then the craziest thing, my account values literally started going through the roof. I was trading in the 10's of thousands at the time, but suddenly my accounts were showing some of my positions being worth 10's of millions. I literally had account values at multiple hundreds of millions for a few minutes. Then, of course, I'm thinking close everything, take profits and run for the hills! I was trying everything and couldn't get a trade to go. Talk about pandemonium! I ended up getting clobbered, losing a lot of money that day. I can laugh now, but Wow, what a ride!
    I would assume many of the DG investors hardly even knew what happened, if at all.

     

    I guess I relate that experience because it was pretty funny but also just to share a scenario that can occur when you "trade" as oppose to invest. That brief moment wasn't the lifestyle I had signed up for. Similar to some others, I'm being converted. Thanks everyone.
    Now off to go order that book.
    Enjoy the day.
    14 Feb 2013, 03:02 AM Reply Like
  • jrepasch
    , contributor
    Comments (779) | Send Message
     
    What a story, jantis. Thanks.
    BTW, what was the date of the flash crash? 10/13/10?

     

    joni
    24 May 2013, 08:57 PM Reply Like
  • J Paradiso
    , contributor
    Comments (20) | Send Message
     
    I always read your comments (and now instablog posts) and I always learn something.
    What I never do is thank you for sharing your thoughts.

     

    So, "Thank You"
    14 Feb 2013, 04:39 AM Reply Like
  • Guitar Man
    , contributor
    Comments (228) | Send Message
     
    What an absolutely fantastic article.

     

    'Nuff said.
    14 Feb 2013, 06:18 AM Reply Like
  • OntheRock
    , contributor
    Comments (185) | Send Message
     
    Another great article. I learn more practical information that I can put to use right away from your posts than from many books. But I do have to thank you for recommending Lowell Miller's book, it is one of the best I have read!
    14 Feb 2013, 04:10 PM Reply Like
  • JGC67
    , contributor
    Comments (36) | Send Message
     
    Great blog and very encouraging. I began dividend growth investing in 2012. I have found a few authors who always offer good, practical information, of whom you are one, and far too many who don't. Thanks again for this good post.
    14 Feb 2013, 09:38 PM Reply Like
  • jrepasch
    , contributor
    Comments (779) | Send Message
     
    Chowder,

     

    Several weeks ago someone on SA mentioned Lowell Millers' book "The Single................... Bought it immediately and received from Amazon within a few days. From the first few pages I kept getting this feeling I'd read this before. Why does Miller's writing seem so familiar? Finally I got it. This is Chowder's investing philosophy.

     

    Too bad I didn't discover you folks on SA-DGI in 2007. Had I done so I would have been much more focused. Fortunately my broker at Morgan Stanley purchased mostly DGI companies for me in 2007 and early 2008. In the long run only the financials (BAC, C) did me in. Most of the other selections are now in the green. And, except for the aforementioned bank stocks, all of those companies paid me nice dividends during those down years.

     

    Now that I know your method I have few excuses for making mistakes.

     

    I'm a lucky lady.

     

    joni
    24 May 2013, 08:51 PM Reply Like
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