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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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  • Let's Talk Risk 45 comments
    Jul 17, 2013 4:35 AM

    There are many definitions of risk and there are as many ways to plan for it. A basic definition of risk refers to the chance that one will be exposed to danger, harm, loss, or things not turning out as hoped or expected.

    In my opinion, with the number of various risks out there, it would be very difficult to design a successful portfolio that could cover them all. In my opinion, risk needs to be prioritized.

    I decided I would break down risk into three categories, based on what I think is more important to me, and ignore the rest. My thinking is that if I can manage the Big Three, quality and time will take care of the other risks that we face in investing.

    Most people define risk as share price volatility. That risk doesn't even show up on my radar unless I am trading or speculating. ... Stocks fluctuate in price! ... If you want the long term gains that stocks can provide, you've got to pay the toll. The toll is price fluctuations.

    I know some are nodding and saying yeah, yeah, yeah. ... You've got to do more than know it intellectually. ... You've got to embrace it! ... If you don't, your investment strategy is going to fall apart, done in by bad decisions, inadequate returns, and all caused by emotional insecurity.

    There is nothing wrong with price fluctuations with an investment that is considered best in breed in an industry, but intolerance of price fluctuations cause many overly cautious investors to pass up wonderful opportunities.

    I don't understand how people can pass up on Tier One companies for Tier Two companies, in favorable market conditions, under the guise that Tier One are fairly valued or above fair value. If share price pulls back and your Tier One companies don't bounce back, nothing is going to bounce back.

    If Tier Two companies aren't following along with the Tier One companies under favorable markets, a time when a rising tide lifts all boats, then something must be seriously wrong with the Tier Two company. If the market pulls back and the Tier One companies follow, what makes you think the Tier Two companies won't pull back? They'll probably pull back even more than the Tier One companies due to weaker earnings performance, which is why they are probably Tier Two companies.

    If one develops the correct perspective, one can learn to appreciate investments that fluctuate. When you deal with quality, time is your ally. Quality companies will bail you out of a poor entry position if you give them the time to do so. It's all about the quality!

    When I purchase a company, I fully expect that the company will establish a new all-time high somewhere down the road. It may be two years out, three years out, five years out, but it will be somewhere. After all, we're talking best in breed.

    If I fully expect higher prices two to five years out, why should I be so fearful of a price pullback in the next month or so? It's crazy thinking!

    It has been said that Warren Buffett's Rule #1 is to not lose money. He is also on record as saying don't buy a company you'd feel uncomfortable holding if it suffered a drawdown of 50%.

    So which is it? ... How do you experience a 50% drawdown in share price and not lose money?

    I believe he's talking about owning and holding high quality companies. These are the companies that have shown they can overcome this type of adversity. These are the companies where you can ignore share price declines as long as the company fundamentals of doing business are intact.

    Now this is important!

    If you choose "real" investments with "investment quality," as determined by their financial credit ratings, the issue of losing your money forever isn't really the right understanding of risk.

    The best long term investment is going to be one where you have the fullest faith and confidence that it will fluctuate back up after it fluctuates down, knowing it will be more valuable over time.

    People tell me how fortunate I was to have purchased so many companies in late 2008 and early 2009 because prices have risen so much since then. ... Everything I bought at the time saw an immediate drop in share price. Everything! ... It wasn't easy buying and holding at the time. And, I was 100% invested. I made the decision if the best in breed didn't come back, nothing was coming back. It was the right strategy to use.

    So this brings me to the three biggest risks that I focus on.

    1. How much money do you need, when do you need it, and how sure are you that it will be there?

    Does it get any more basic than that?

    The first two criteria are easy. I know what I need and I know when I need it. ... How sure are you that it will be there? ... That's the crux of a successful business plan.

    Therefore, I define risk as the possibility of suffering a long term realized loss of capital, an unexpected decrease in the income flow, or not having the stated income flow at the time it is needed.

    If you want to be sure that the money will be there when you need it, then that brings us to the second risk.

    2. Company specific risk.

    In my opinion, if one is to enjoy "long term" success, then the safest way to accomplish that is by owning the best of the best.

    The very first thing I look at in the due diligence process is the company's financial safety rating, their credit score if you will. If a company doesn't grade out at investment grade, I go no further in my due diligence. This to me, is common sense investing.

    If you were to buy a company outright, wouldn't you have the CPA's inspect the books? Wouldn't you want to know if the company were profitable or not? Wouldn't you want to know if the business was sustainable? Wouldn't you want to know the company's earnings potential?

    Why should it be any different when we invest in equities? We are purchasing ownership in an ongoing business. Shouldn't we be just as concerned about that as we would be if we bought the company outright? ... Think about that!

    I see people all the time chasing yield as opposed to buying financially sound companies.

    Take NLY for example. It has only raised its earnings in 5 of the last 10 years, lowered the dividend in 5 of the last 10 years, are expected to show lower earnings this year and next, and are also expected to have another dividend cut. ... This is quality? ... Is this considered as being financially sound? ... I don't get it unless people are simply chasing yield or speculating. It certainly doesn't satisfy the criteria of what most would consider a long term quality company.

    How sure are you that the money you need will be there when you need it, if you invest in companies like these?

    It's all about quality!

    This brings me to my third and last risk concern.

    3. Safety of the dividend.

    I realize that as a dividend growth investor, the focus should always be on the dividend growth. However, there are times when market conditions will go against you and some companies must freeze the dividend. One of the tactics I use is to determine a company's history with regard to whether they have cut the dividend in the past or not.

    Here is what I am looking for. If push comes to shove, what is the worst I can expect? You measure what you might gain by what you might lose. Anyone who has suffered from dividend cuts has experienced significant capital depreciation.

    I look to see if declining dividend growth is a prelude to a dividend freeze and then I look to see if a dividend freeze was a prelude to a dividend cut. It may not work with all companies, but whatever information I can muster helps me make better decisions towards my goal.

    How sure are you that the money you need will be there when you need it?

    Most of the time, when dividend growth slows down to low single digit numbers, I sell and move on, looking for replacements that are still raising the dividend at higher growth rates, while maintaining high quality in the type of company I purchase.

    Then there are companies like General Mills (NYSE:GIS) who have been paying a dividend for 114 years, and in that time they have never lowered the dividend. Not once! They have had to freeze the dividend, but they have never lowered it. Think about that! We have had many crises and changes over the last 100 years and they kept paying the dividend, never lowering it. GIS is one of the few companies I will continue to hold and add to in the event they freeze the dividend again. They have shown over a long period of time that a dividend freeze is not a prelude to a dividend cut.

    How much money do you need, when do you need it, and how sure are you that it will be there?

    I think I can count on companies like GIS.

    Realty Income (NYSE:O) is another company you can count on for a safe dividend. They advertise themselves as "The Monthly Dividend Company." With a Mission Statement like that, they will do everything in their power to see that the dividend is safe. Every business decision they make keeps the share owner and that dividend in mind. What more could you ask for? They raise the dividend every quarter. They have been paying that monthly dividend for 44 consecutive years now.

    Worst case scenario? Low dividend growth, but that dividend is rock solid!

    How much money do you need, when do you need it, and how sure are you that it will be there?

    Conclusion:

    Part of the "price" one has to pay in order to achieve long term investment success is that they need to learn to tolerate price fluctuations.

    Dealing with price fluctuations can be simplified by purchasing high quality, financially sound companies, that have shown a history of surviving and then thriving in the face of adversity. -- Your lack of emotional relation to your investments and the daily swings in price will make all of the difference between good and bad decisions.

    If you should purchase a company and the market reverses shortly after, keep in mind that if you are looking long term, quality companies will bail you out over time. They will bounce back. That's part of what makes them quality. Meanwhile, you'll get paid while you wait and what more could you ask for?

    The best long term investment is going to be one where you have the fullest of faith and confidence that it will fluctuate back up after it fluctuates down. This will make it more valuable over time.

    How much money do you need, when do you need it, and how sure are you that it will be there?

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Comments (45)
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  • compounding
    , contributor
    Comments (206) | Send Message
     
    Great article Chowder! Took me a long time to figure this out, and I admit I still screw it up from time to time ;)
    17 Jul 2013, 08:57 AM Reply Like
  • 7820771
    , contributor
    Comments (4) | Send Message
     
    Great advice and information.
    Simple, but not easy.
    Thank you for all of your honest, thorough, and useable contributions.
    Chowderhead4ever.
    17 Jul 2013, 09:06 AM Reply Like
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (3749) | Send Message
     
    Chowder,
    Thank you for good blogpost.
    I agree that for long-term investor price fluctuations are minor and with your risk factors.

     

    1. "How sure are you that it will be there?" -I didn't find the answer in the post. Did I read too fast? Probably answer on such question with 10+ years of time horizon is in old joke <At statistics exam a teacher asks a blonde "What is probability if you'll meet a dinosaur at street?" The blonde answers "50%". The teacher - "Why?". The blonde - "There are only 2 possibilities - I'll meet or I will not meet, so probability is 1/2 = 50%" >
    OK on serious note: Is it a public (i.e. free ) roster of Tier One companies? I know Forbes "Global 2000 Leading Companies" but it not exactly that.

     

    2. Company specific risk. I guess for Tier One companies major risk is destructive innovations rather than competition (they already won especially if second one is much smaller) and bad economy (except if their debt is huge).
    It'd be nice to see SA articles or posts on specific risk (although I do not read SA articles on individual companies expect if title says something like "ABC dividends are in danger").
    Side note: I own NLY (as 1% part of HY) - I consider it (and 2 similar in dividends firms) as wild cash cows with YoC~ 10% /for average dividends they paid in the past/ which milk I can use for investment in more stable companies.

     

    3. Safety of the dividend. The prime goal of Dividend Heritage Project is find the answer on this topic (http://seekingalpha.co...). IMO it was OK to freeze dividends in 2008-2013/?/ because it was very difficult to borrow money for a business. "I look to see if a dividend freeze was a prelude to a dividend cut." - how do you look? BTW, one observation within Dividend Heritage Project is that companies with DCR=0 (i.e. with flat or frozen dividends) cut dividends more rarely than companies with DGR>0.

     

    SDS
    17 Jul 2013, 09:14 AM Reply Like
  • Chowder
    , contributor
    Comments (9346) | Send Message
     
    Author’s reply » Tier One companies to me are companies that sell a product or service we must use regardless of economic conditions and have credit ratings that are investment grade.

     

    I like to keep things simple. ... Ha!
    17 Jul 2013, 12:17 PM Reply Like
  • spielerman
    , contributor
    Comments (243) | Send Message
     
    Was watching Seinfeld and George was talking sweet to his potential girlfriend about how toliet paper is going to be the same as it is now 10,000 years from now. I immediately thought about core stock holdings. This might help you figure out Tier 1 companies and the types of products they sell.
    17 Jul 2013, 03:39 PM Reply Like
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (3749) | Send Message
     
    Thank you for explanation Chowder.
    I also like to keep things simple but your definition "Tier One companies to me are companies that sell a product or service we must use regardless of economic conditions and have credit ratings that are investment grade" isn't perfect IMO. Who are "we"? ....US residents? - but they didn't face a really bad economic conditions (except may be first decade of colonization)... Look on a pure African country there most of population cannot afford enough food.....
    I did analyzed The GEO Group, Inc. (GEO) which serviced prisons i.e. "service we must use regardless of economic conditions". I don't remember their credit ratings (and I agree that it should be good) but I doubt that they qualified for Tier One even with AAA credit.
    Can a small firm that provide life-need service in a rural community without competitors with no debt (credit rating agencies ignore it) be qualify as Tier One? I doubt but it seems that such firm fits your definition.
    Anyway, I guess I can see that do you mean and if this definition works for you - it's fine.
    Good luck!
    SDS
    18 Jul 2013, 05:37 AM Reply Like
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (3749) | Send Message
     
    Well I hope toliet paper will NOT be produced from trees 10,000 years from now, so it would NOT be the same.
    18 Jul 2013, 05:41 AM Reply Like
  • Chowder
    , contributor
    Comments (9346) | Send Message
     
    Author’s reply » GEO would not qualify for a Tier 1 holding with me, it's not a dividend growth stock that meets all of my criteria.

     

    It doesn't sell a product or service most people must use regardless of economic conditions. I suppose you could stretch it and state a small segment of society does, but it wouldn't qualify for me, regardless of the company's Financial Strength Rating.

     

    Additionally, it doesn't meet the Chowder Rule of a 3% minimum yield and a 5 year CAGR of 9%.

     

    If I were to purchase it, and I'm not, I would list it under speculation, not Tier 1.
    18 Jul 2013, 06:54 AM Reply Like
  • jrepasch
    , contributor
    Comments (1273) | Send Message
     
    Chowder,

     

    Where do you find the credit ratings of a company?

     

    Value line, S&P Reports, Morningstar?

     

    Thanks,

     

    joni

     

    18 Jul 2013, 08:50 PM Reply Like
  • Chowder
    , contributor
    Comments (9346) | Send Message
     
    Author’s reply » Joni, all of the above!

     

    M* is free though.

     

    http://bit.ly/18s7mU3

     

    If your brokerage firm provides analyst reports, they should have some sort of rating for companies.
    19 Jul 2013, 07:10 AM Reply Like
  • Dividend Math Guy
    , contributor
    Comments (408) | Send Message
     
    S&P will also give you their credit ratings if you register a free account with them.
    19 Jul 2013, 03:42 PM Reply Like
  • jrepasch
    , contributor
    Comments (1273) | Send Message
     
    Thanks, Chowder.
    joni
    19 Jul 2013, 03:42 PM Reply Like
  • meamakim
    , contributor
    Comments (36) | Send Message
     
    Thanks for the excellent article.

     

    Any guidelines on when to buy into companies like GIS and O? Right now GIS seems pretty high, but O looks more reasonable. Would you agree?

     

    Thanks again,
    17 Jul 2013, 09:33 AM Reply Like
  • Shelby Cardozo
    , contributor
    Comments (837) | Send Message
     
    A year ago, even six months ago my acquisition list was much longer. I these valuations, finding quality stocks is much, much harder.
    17 Jul 2013, 11:27 AM Reply Like
  • Chowder
    , contributor
    Comments (9346) | Send Message
     
    Author’s reply » @meamakim ... I wouldn't have any problem buying O or GIS right here as long as you can deal with price fluctuations and not panic.

     

    In fact, I expect I will buy some GIS later today. I want to see how the market reacts in the last hour before making that decision. An old habit from my trading days.
    17 Jul 2013, 12:15 PM Reply Like
  • peace4
    , contributor
    Comments (495) | Send Message
     
    Chowder, you always write so that I am sitting here nodding my head in agreement.

     

    "How much do you need" was a topic of discussion I had with my mentor about 35 years ago and we sat down and assigned a numerical value to the word "enough". We wanted enough so that a car would be reliable but not fancy so for figuring purposes, we decided a Toyota stationwagon or equivalent purchased new every five years would accomplish that. Then we figured out the annual house care budget for taxes, insurance, paint every few years, a new roof or some other major upgrade every few years, normal utility bills, and all the other costs of home ownership. Then we figured out the cost of normal family vacations, medical bills and insurance, a fund for "stuff happens" and we decided we wanted all this covered by the fixed income plus reliable dividend income. And we wanted regular raises so we would never be pinched down as folks get to be on all fixed income when the purchasing power of the dollar shrinks with inflation. This definition of "enough" took quite a few days to talley up so we were pretty sure we had everything listed when we began the next phase - how much did we need invested to accomplish it....?

     

    He figured that 3% was about what could be spent by a dividend growth investor (just the dividends which would be increasing faster than inflation over time) and still there would be the option of selling some of the shares themselves in case of totally unforseen and dire emergency in old age.

     

    This was an important exercise because all the commercial advertisements tend to make us think we need to spend way more than we really and truly want or need in order to live securely and happily. But once you make a decision about what you really and truly want or need, you can better ignore those advertisements and more easily arrive at "enough" and live happily and securely right there.

     

    Of course in the past 35 years we have had to include computers and mobile phones, cable tv, and other such fancy things into our lives so the plan needed to be revised to include these things, but that has been easy enough because the dividends increase faster than inflation and can cover that.

     

    Your article is just a wonderful reminder of what we did so long ago. It is not so hard to reach satisfaction in life once you make a definition of what is satisfying.

     

    Peace
    17 Jul 2013, 11:07 AM Reply Like
  • Chumpmenudo
    , contributor
    Comments (662) | Send Message
     
    Chowder:

     

    You're writing is excellent, well done. A hypothetical question for you; if you suddenly came into a chunk of cash, say $300k from the sale of a property, how would you invest that cash? Would you divide amongst all your current holdings and just jump right into the market now? Or might you dollar cost average in over some longer time frame, say one year to 18 months?

     

    Best,

     

    Chump
    17 Jul 2013, 12:35 PM Reply Like
  • Chowder
    , contributor
    Comments (9346) | Send Message
     
    Author’s reply » I'm rolling money from an old 401K into a Traditional Ira in September. I can't get my hands on it until that time.

     

    I will be investing all of it among the companies I already own. I don't wish to play the spread em out game. I'm going to buy quality anytime I have cash available to me, but I'm not bothered by price fluctuations. I can stand the heat.

     

    You must do what feels comfortable to you. Peace of mind is important.
    17 Jul 2013, 12:54 PM Reply Like
  • Chowder
    , contributor
    Comments (9346) | Send Message
     
    Author’s reply » Chump, I should probably expand on my comment to you. From my perspective, cash doesn't earn income. It's why I stay 100% invested.

     

    Some people are worried that price will pull back and show paper losses. That doesn't concern me if I stick with blue chips. It would concern me if I held companies like NLY, PBI, FTR, etc.

     

    As long as I'm not speculating, and willing to hold for the long term, I jump in with all cash available. Keep in mind, I'll be adding to these portfolios as I go along anyway. As I come up with more cash, I put it to work immediately.

     

    I did open that position in GIS today in one of the portfolio's I manage. When he sends in his monthly contributions next month and the month after, along with the dividends he will receive, I will add some GIS at that time as well.

     

    My only regret is he didn't get his cash into the account on time to lock in the August dividend which was raised 15% this year. Whoo Hoo!
    17 Jul 2013, 03:51 PM Reply Like
  • Chumpmenudo
    , contributor
    Comments (662) | Send Message
     
    Thanks Chowder. For me, dollar cost averaging has been awesome throughout my investing life. I started positions in good companies or low cost funds, then just added a bit every month, careful to minimize commission costs on stocks.

     

    You buy more shares when prices are down, fewer when they are up, and in the long run, with more money added every month, and reinvested dividends, the shares really compound and grow.

     

    I had never had a "big" chunk of cash to invest all at once, so the strategy was one of necessity.

     

    Now that I'm older, I come upon "big" chunks of cash once every so often, and my natural inclination is to put it into a money market account and dollar cost average my way into stocks. It's hard to shake that habit, but I suspect my returns might be better, over many years, if I were to invest the entire chunk as soon as possible!?

     

    Just thinking out loud,

     

    Chump
    17 Jul 2013, 04:59 PM Reply Like
  • Dividend Math Guy
    , contributor
    Comments (408) | Send Message
     
    Chump,

     

    I think this one of those things where you should just do whatever helps you sleep best at night. If you were to invest it all today and there's a correction tomorrow, then you would have been better off DCAing. But if you were to DCA that money and there's a correction right as you're finishing that up, then you would have been better off investing it all right at the start. If you're going to get stung in a correction, then DCAing tends to sting less, but it also tends to provide smaller returns.

     

    If I were you I would probably invest as much as I'm comfortable with right now (depending on valuations) and DCA the rest over a fairly short - say 1 to 2 year - time frame. The next correction is coming, but we don't know when and we don't know if it will even end up correcting as far back as today's prices when it happens.

     

    I would also consider where the money came from. If it were from sale of property, for instance, then I would consider that money to have been invested the whole time it was in the property, so it should remain invested. Trying to dance in and out of investments is usually a bad idea.
    17 Jul 2013, 08:05 PM Reply Like
  • Contraria2
    , contributor
    Comments (399) | Send Message
     
    Chump,

     

    I'm a DCA person. I add to 10 positions every month via Computershare and Wells Fargo. (e.g., PM VZ GIS LMT KRFT SO etc.)

     

    I never buy 'full' positions. I'm not sure I even have full positions, cause I will always buy more of a stock if it gets hammered - and I still like it.

     

    Like DT said above, do whatever you're comfortable with.
    17 Jul 2013, 08:21 PM Reply Like
  • Mike Nadel
    , contributor
    Comments (11775) | Send Message
     
    There have been many DCA studies. If I remember correctly (and I'm too lazy to do lots of research just for this comment), those who DCAed and those who lump-summed ended up in similar places. I think the lump-summers might have had a slight advantage.

     

    But as chowdah said, a lot has to do with comfort. DCA, as a strategy, can be comforting for the exact reasons Chump listed. If DCAing gets a person investing rather than sitting on the sideline, it is a good strategy.

     

    I do some of both. If I decide "this is an absolutely fantastic value today," I go all-in. I did that with WAG at $30 and haven't regretted it. If I say, "I really want this company but I'm just not totally committed to this price," I'll buy in chunks. I will say, with the latter, I have tended to average up and probably would been better off buying in lump sums.

     

    I did use PG's in-house DRIP plan for 4+ years, starting in 2008, continuing through the worst of the Great Recession and not stopping until 2012, when I had as much PG as I felt I wanted. Classic DCA, and it worked pretty doggone well to build my PG position. Unfortunately (or not; jury's still out), PG just contracted with Computershare to run its DRIP.

     

    For those seriously conflicted on the DCA-or-not conundrum, I recommend doing the Internet research that I didn't feel like doing right now.

     

    Mike
    18 Jul 2013, 09:55 AM Reply Like
  • Shelby Cardozo
    , contributor
    Comments (837) | Send Message
     
    Did GIS meet the 3% and 9% CAGR when you bought it I'm wondering?
    18 Jul 2013, 01:11 PM Reply Like
  • Mike Nadel
    , contributor
    Comments (11775) | Send Message
     
    Garth:

     

    Since I also bought GIS recently, I'll answer: Yes.

     

    Dividend Yield is 3%. 5-year DGR is 10.8% (as per Dave Fish CCC list). That's a "Chowder Rule" number of 13.8.

     

    Mike
    18 Jul 2013, 01:25 PM Reply Like
  • Chowder
    , contributor
    Comments (9346) | Send Message
     
    Author’s reply » Although GIS met the Chowder Rule number when I purchased it, now that I own GIS, I will manage them a little differently than I do most positions.

     

    Safety of the dividend is one of the most important rules in building an income stream. Dividend growth is one way to monitor a company's financial health and is often a line of defense in warning that a dividend cut is coming.

     

    CTL went from raising the dividend for 37 years and then freezing it. Who does that? That was a red flag to me. I sold it immediately. I saved a lot of capital gains by doing so. CTL eventually cut the dividend.

     

    All of the companies people want to throw up there, Kodak, GM etc. that destroyed peoples investment in them, went from dividend growth, to a freeze, to getting in trouble. That's why I monitor dividend growth and put companies on probation if the dividend growth drops below 5%.

     

    GIS has been paying a dividend for 114 years and has never lowered the dividend. Not once! They have frozen it many times, but they have never lowered it. GIS has shown over decades and decades that a dividend freeze is not a prelude to a dividend cut. So they are one company I would continue to hold in the event they freeze the dividend again.
    18 Jul 2013, 02:10 PM Reply Like
  • jrepasch
    , contributor
    Comments (1273) | Send Message
     
    Chump,

     

    Would never consider suggesting what you should do. I'll leave that to the experts here on the thread who have had much more experience than I.

     

    My dear step-dad died in 2005. My mom died many years before. In 2007, I had sold their house and completed my dad's trust fund requirements. Yes, it took almost a full 3 years to put the trust to rest. After all the taxes were paid, the gifts were distributed to family members (my dad had brothers and sisters, numerous nephews and nieces, plus my two boys and our 3 grandchildren) and charitable organizations, my dad left me a nice sum of money. 3/4 of the total was invested in a mutual fund and 5 or 6 muni-bond funds at Morgan Stanley. I kept the account with them.

     

    Funds from the sale of the house were deposited with Morgan Stanley and my broker began purchasing shares of stocks in June of 2007. All were dividend paying companies. By the end of 2008 all but a small portion of the total was invested.

     

    Well, we know what happen in 2008 and 2009. I think my broker was more upset with the decline in my portfolio than I was. Fortunately most of those companies continued to pay and raise dividends during this period. By the end of 2012 this portfolio and my 4 personal accounts had returned to 2007 highs. Actually much higher. However, income, not wealth is my main investing goal.

     

    Bottom line is, if you purchase good companies and don't panic, you'll be rewarded at some future point, even in an up and down market.

     

    I'm almost 75, my hubby 80. I didn't discover DG investing until about a year ago here on SA, so I'm still learning, but this method works for me.

     

    I have retained most of my dad's mutual fund, but have sold all of the muni-bond funds except for a small amount in one fund. Since late 2009 I've been slowly purchasing the best companies I can find, but often not at an undervalued price.

     

    This week I sold all shares in a non-tier company (WY) in which I made a nice long-term profit. Tomorrow hope to pick up GIS. Would love to buy O too but not enough cash for both.

     

    Best of luck to you in your future investing. You'll sure find lots of excellent ideas here in this DG group at SA.

     

    joni
    18 Jul 2013, 09:53 PM Reply Like
  • JuliaC
    , contributor
    Comments (41) | Send Message
     
    I, and probably most people, will DCA from cash to avoid the regret associated with buying stocks just before a market collapse.
    But, in a hypothetical situation, if I would have inherited a DGI portfolio with exactly my perfect allocation with all my favorite CCC stocks - I would not sell it, converting to cash and DCA from cash. I would hold it, despite the fact that I’d be facing the *exact* risks that my DCA action was meant to avoid.
    This is something to think about. We sometimes avoid taking action to minimize regret in a case of a failure.
    Another idea is: investing half of the money right away and DCA the other half over time. Just to do it half-and-half.
    27 Jul 2013, 05:00 PM Reply Like
  • Tradevestor
    , contributor
    Comments (4104) | Send Message
     
    Added a bit more to O today. Average price is now $42ish at a nice 5% plus yield, thanks to Chowder for bringing it to my attention some time back.
    17 Jul 2013, 03:00 PM Reply Like
  • BlueSkyForever
    , contributor
    Comments (2137) | Send Message
     
    So true about waiting for quality stocks to dip. (KO) Coke reported and the stock dropped; today (KO) is already up 0.58 or 1.44%. I've been watching (HSY) Hershey for awhile. It's one of those stocks that never really goes down. As soon as I have the cash, I will just go ahead and buy in.

     

    If you buy the quality stocks, like Chowder has said repeatedly, you don't have to worry about the stock going down for long. Long term, if you check the 10 year charts, you made money in all these stocks - and if you held the full 10 years, 2008/2009 declines made no difference. I always check the 10 year chart, to be sure this is a company that is always going up, if held long enough.

     

    I'm deciding what to buy for my son's Roth IRA. (MCD) for sure and probably (CSX). If I split it into 5 stocks, that would work too.

     

    After being in mutual funds for years, and a few ETFs, I am now rotating out of them and into stocks. It's so much more gratifying owning your own stocks than owning mutual funds & ETFs. CNBC reported today that historic amounts of cash are coming into mutual funds and ETFs.....so you know this market is going up.

     

    http://cnb.cx/18o6mjK
    17 Jul 2013, 03:03 PM Reply Like
  • spielerman
    , contributor
    Comments (243) | Send Message
     
    "There is nothing wrong with price fluctuations with an investment that is considered best in breed in an industry, but intolerance of price fluctuations cause many overly cautious investors to pass up wonderful opportunities."

     

    This is so true since one of your best investment books, "single best investment" said time and patience are two keys to the machine.

     

    The point was made that stocks trade at a price relative to their earnings. If a company is growing their earnings, and does so over a long period of time, eventually the price would catch up with it.

     

    I was just running some numbers over a 20 year period of time to see what goes on with dividends reinvested.
    Stock at a 20 PE
    Stock yields 3%
    Stock dividend grows dividends 8% a year.
    Fair payout ratio currently.
    Stock flat until PE last day of year in year 20, so reinvesting dividends same share price over period (not realistic, but just a model).

     

    After 20 years, CAGR of dividend reinvested only: 7%!!!
    Say stock then trades at a PE of 15.
    If Earnings grew 5% a year, Total Return would jump to 10.7%.

     

    So I've experienced a PE contraction of 20 to 15 over 20 years, but still compounding is the machine to returns.

     

    I know I've got some simplifications here, but the illustration speaks to quality companies today, time, reinvestment. Even with a large contraction of the PE at the end, the return is still fantastic...
    17 Jul 2013, 04:00 PM Reply Like
  • kolpin
    , contributor
    Comments (1240) | Send Message
     
    what constitutes a Tier 1 company and a Tier 2 company is not always so black and white. I think some DG investors can fall into the trap of creating a too narrow view of what constitutes a Tier 1 company--to the exclusion of some great companies. is LMT a Tier 1 company and are RTN/GD "only" Tier 1.25 companies? hell if I know, so I bought both LMT and RTN this spring on a pullback--and now they're both up about 30%. if RTN dipped 10% over the next month but LMT stayed flat or went up, it's RTN that I'd be adding to.
    17 Jul 2013, 05:55 PM Reply Like
  • Chumpmenudo
    , contributor
    Comments (662) | Send Message
     
    Good point Kolpin; I originally intended to have two groups of stocks, my core and "non core," or Tier 1 and Tier 2. The line between the two is pretty bleary. Some of tier 2 stocks are pretty solid like CMI, GD, MSFT, CSCO, KSS, OHI, COP, and MO.

     

    Chump
    18 Jul 2013, 01:46 AM Reply Like
  • Mike Nadel
    , contributor
    Comments (11775) | Send Message
     
    kolpin/Chump:

     

    I have made my line between "first-string" companies and "role players" (or "second-stringers"). Yes, the line can be a little bleary, but you have to start somewhere or else you'll just be buying things willy-nilly.

     

    One always can adjust. As is the case in sports, today's role players can earn their way into the starting lineup.

     

    I wrote about my portfolio-building project in my most recent article - http://seekingalpha.co... - and will tell everybody right now that chowdah's guidance has been valuable.

     

    Mike
    18 Jul 2013, 10:00 AM Reply Like
  • Sum02006
    , contributor
    Comments (419) | Send Message
     
    Excellent blog post, chowder! I especially liked this advice:

     

    "When I purchase a company, I fully expect that the company will establish a new all-time high somewhere down the road. It may be two years out, three years out, five years out, but it will be somewhere. After all, we're talking best in breed.

     

    "If I fully expect higher prices two to five years out, why should I be so fearful of a price pullback in the next month or so? It's crazy thinking!"

     

    I think this advice is something to always keep in mind.
    17 Jul 2013, 06:24 PM Reply Like
  • maybenot
    , contributor
    Comments (4651) | Send Message
     
    Thanks chowder -- love reading your writing. You help me to think critically and longterm.

     

    Also, you help with giving specific detailed advice that I can then use myself -- I like that in an article/blog and I need that.

     

    For instance -- "credit rating" -- yeah sure, I looked at it, thought about it, and usually forgot about it. But, agree, you want to know what the CPA's think about this company you are about to dump some money in.

     

    O and GIS have been on my watchlist. Just recently went with KO instead of GIS -- it was a toss-up at the time.

     

    Thanks again for cranking this blog out -- we (at least I do!) need all the help/advice we can get.
    17 Jul 2013, 06:29 PM Reply Like
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (3749) | Send Message
     
    Chump,
    Formally the history of US stock market shows that probability of prices go up is higher than probability of prices go down, so you need invest ASAP when you have money. Less formally you need to look on basics like P/E before you invest. If P/E ~ 100 at the time you have money it is PROBABLY better to wait. So no single answer.
    SDS
    18 Jul 2013, 06:17 AM Reply Like
  • Chumpmenudo
    , contributor
    Comments (662) | Send Message
     
    SDS, of course I agree. With the bias upward, it seems to me that lump sum will be better than DCA in aggregate, but as you point out, it's hard to throw money at historically high PE ratios....my brain forces me to DCA into these.

     

    I've wanted to own O for over a year. I decided to just bite the bullet and start a position in March at around $44. I bought around 25% of a full position. The stock rose. In June, the stock dropped, and at $41, I added another 25%. Now it's rising again.

     

    This worked out fine, but I still only have a 50% position, and the stock could just have easily not corrected in June, then I'd be sitting here with a 25% position, wondering if or when I should buy more.

     

    I guess dollar cost averaging just makes me feel better, though it probably hurts my overall returns ;-)

     

    Chump
    18 Jul 2013, 01:24 PM Reply Like
  • Mike Nadel
    , contributor
    Comments (11775) | Send Message
     
    chowdah:

     

    As usual, wonderful stuff. Very timely in the current market, too.

     

    You have been a great mentor and friend.

     

    Mike
    18 Jul 2013, 10:01 AM Reply Like
  • Chowder
    , contributor
    Comments (9346) | Send Message
     
    Author’s reply » Thanks Mike.

     

    People want to make things more difficult than they really are. Some will look at the recent KO earnings and decide, whoa KO is in trouble.

     

    How many times in their history have they missed earnings? Quite a few. The dividend keeps coming, the dividend keeps growing and KO keeps on selling Cokes, and then they have a series of great expectations.

     

    People want to make a big deal out of soft drinks not being healthy and that their business is going to suffer because of it. Well, I don't think that's going to happen in my lifetime and the thing to remember is that it isn't the KO syrup that is their greatest asset anymore, it's their distribution line. Companies would kill to get their hands on that.

     

    If the day comes where KO can't sell Cokes, they'll figure out something that will take advantage of their distribution set up.

     

    I like to keep things simple.

     

    The people that run these companies that have survived for over 100 years are usually pretty smart people. They go through business cycles like anyone else but what separates them from the wannabes is their ability to overcome those adversities, and that's why I can put my mind to rest about price fluctuations and all of the other market noise.
    18 Jul 2013, 02:32 PM Reply Like
  • Sum02006
    , contributor
    Comments (419) | Send Message
     
    Chowder,

     

    I agree 100% with your analysis of KO and I believe that it applies to several of the other bluest-of-blue-chip companies too. Companies like KO, PG, JNJ, XOM, GIS, etc. succeed in large part due to their elite officers and employees who are constantly adapting to changing dynamics and creating more efficient businesses.

     

    DVK brought this point home using PG as an example a year or so ago in this article: http://bit.ly/12ZXqch.

     

    I don't see companies like those I mentioned above crashing anytime soon and would expect my grandchildren to look back at these companies and marvel at the innovation they went through to stay relevant and profitable.

     

    These companies may be "boring" and they won't make you an overnight millionaire, but they will give you a secure and increasing income stream over the long term, and that's good enough for me.
    19 Jul 2013, 09:58 AM Reply Like
  • jrepasch
    , contributor
    Comments (1273) | Send Message
     
    Chowder, et al...........Thanks for a most enjoyable evening reading your blog. Sure beats most shows on TV. 'Ha'

     

    Say hi to Percy.

     

    j
    18 Jul 2013, 09:55 PM Reply Like
  • MotleyFool
    , contributor
    Comments (5) | Send Message
     
    Great article Mr.Chowder. I used to chase yields in the past with various mReits in my portfolio and you would have easily guessed how that ended up for me. I just started following your mantra "predictable dividends" and "what are the essential commodities that people have to buy for a living even during a recession" . Owning high quality companies like GIS gives me at least a nebula of guarantee that even if they don't increase dividends at least they are unlikely to cut dividends in future.

     

    I have bought bunch of stocks GIS, UNP, ADP at their 52 weeks high couple of years back but they have been hitting new highs every year

     

    I had glanced over SBI (Miller's book) a while back but had missed the investment advice nuggets with my quick habit of glancing over books until you recommended in one of your comments to re-read it several times.

     

    In one of the paragraph he clearly mentions that if an asset produces an income , the capital appreciation will eventually flow and the stock price will raise itself eventually. I had only mapped this about real estate (the more the rent income, the more the house value) but never had applied this to the stocks I buy.

     

    Please keep writing

     

    19 Jul 2013, 12:13 AM Reply Like
  • sameer syed
    , contributor
    Comments (20) | Send Message
     
    Chowder, thanks for sharing your extra ordinary wisdom; I continue to learn and benefit from your comments and instablogs! I hope we are able to contribute to other' success some day as you do! best regards, Sameer
    19 Jul 2013, 03:30 AM Reply Like
  • SkipK
    , contributor
    Comments (1159) | Send Message
     
    I am commenting just to remind my self to stick with quality (thanks Chcuk C., Mike N. and Chowder) and to berate myself for the occasions when I've not done so. Owning quality provides for restful nights, which surely must be part of the "dividend".
    11 Aug 2013, 05:39 PM Reply Like
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