Dividend Growth Investing And The Benefits Of Being Patient

Includes: APD, JNJ
by: The Part-time Investor


You need patience to be a long-term investor.

Dividend Growth Investing makes it easy to be patient.

Focus on the dividend, and not on capital appreciation, and you will achieve good results.

To be a successful long-term investor you need patience. Let's say you buy a stock that you believe is undervalued. When you invest for capital appreciation, and the stock price doesn't rise, it is very tempting to sell the stock and move on to something else, even if you still feel the stock is undervalued. But someone receiving a dividend will be more likely to continue to hold the stock until the price finally starts to rise.

To be a successful long-term investor, you must be able to control your emotions. It often takes a long time for an investment to achieve the results you desire. If you let your emotions (fear that the stock price will fall, anger/frustration that the price has not gone up) get the best of you, causing you to sell too soon, you may lose out on what could have been a great investment. Dividend growth investing [DGI] is not a get-rich-quick scheme. It requires a long-term commitment, and the ability and willingness to wait for many years, even decades, to achieve the results you desire. If you do put in the time, and be patient, the results will come.

Let me demonstrate what I mean. In December of 2009, I bought Air Products and Chemicals (NYSE:APD) for about $82 per share. APD had a long record of paying a good dividend, and it was a local company that I was familiar with. Unfortunately, within two months, the price had fallen below $70, and by the end of June 2010, it was below $65. Had I been buying APD for price appreciation, I probably would have panicked and sold it before it dropped any lower. But I am a dividend investor, and even as the price dropped, APD actually increased its quarterly dividend in March of 2010 from $.45 to $.49 (an 8.88% increase). The dividend seemed secure, so I held on. By July 2011, only one year later, the price had increased to $97, and the quarterly dividend had been increased again to $.58 (an 18.3% increase). My stock was up 18%, not including dividends. But the roller coaster ride was not over.

By August of 2011, APD was back down to $75. It continued to trade between the mid-70s and low 90s for the next two years, and as of November 12, 2012, the stock was still only $80, lower than where I bought it. But the yearly income I was collecting had increased 52.82%, from $77.40 to $118.36. Finally APD started to go up, yet again. And now, in April of 2014, the price is just under $120. Had I grown impatient and sold APD due to the lack of price appreciation from December '09 to November '12, I would have missed out on the gains over the past one and a half years. Instead, as APD has continued to raise its dividend, I have been adding to the position to the point where my initial 43 shares has now increased to 111 shares. The income I collect from APD has increased from $77.40 per year to $341.88 per year, and I have achieved a 13.56% annual return.

My point in telling this story is that none of this would have happened if my focus was on the price, and not on the dividend, and if I did not have the patience to allow the dividend growth and reinvesting to work its magic. Had I not been a dividend growth investor, I probably would have sold APD a long time ago. If I were only looking for capital appreciation, I probably would gotten fed up with the roller coaster ride and abandoned the stock. But I wasn't looking for price appreciation. I was invested in APD for the dividend, not for capital appreciation. From the time I bought it in December, 2009, the dividend had increased from $.49 to $.77, a 57% increase in 4½ years. I was collecting my dividends the whole time I owned it, and because the stock was giving me exactly what I was looking for, I had no problem holding on to the position through all the price volatility. I never even considered selling it. In fact, I was re-investing funds into APD while the price was still in the 80s. So now that APD has been on a nice run, I have been able to enjoy the increase in the value of my original shares, but I also have many more shares, due to my dividend re-investment, additional investment, and my confidence that due to the growth in the dividend, the price would eventually follow.

When buying for capital appreciation, it is easy for someone to let their emotions get the best of them and cause them to sell a stock whose price has fallen, even if the underlying fundamentals are still strong. It takes patience and faith in the company to be able to hold on through the tough times until the stock gives you the results you expect. That is one of the hidden benefits of DGI. By the nature of the DGI style of investing, the patience it requires to be successful comes fairly easily. DGIers are undaunted by price volatility. By changing your focus from the stock price to the stock dividend, it's much easier, from an emotional point of view, to ride out the volatility. In fact, you're often not even aware of it, since all you see is your dividends increasing year after year.

Let's look at another example. Assume you bought Johnson & Johnson (NYSE:JNJ) in October of 2005. At that time, the price of JNJ was $61.34. Between October of 2005 and November 2011, JNJ's price was basically flat. The return from price appreciation was zero. Someone investing for capital gains may have chosen to sell it at any time during this time period due to frustration or impatience with the lack of any kind of return. But the DGI investor during this time would have noticed that the quarterly dividend increased from $.33 per share to $.57 per share; his income increased from $215.16 per year to $771.27 per year (assuming a $10,000 investment) and, due to reinvestment of his dividends, his number of shares increased from 163 to 192.82. Now, today, with Johnson & Johnson's price finally moving up to around $100 per share, the patient DGI investor can see what his patience has brought him. He owns 207.91 shares, his return, although zero as recently as November 2011, has now increased to 9.00% annually, and his stock is now worth about $21,000. So, from October 2005 through today, he was able to achieve a 9% annual return through one of the worst stock market crashes ever, simply by being patient. At any time from October 2005 through November 2011, someone not investing for the dividend would have been very tempted to sell JNJ, since the price had stagnated. But due to the patience typical of DGIers, the JNJ investor now has a very nice return and continues to receive increasing dividends year after year.

Patience is essential to be a long-term investor. Investing can be a very emotional thing. You feel excitement when your stock goes up. You feel depression when your stock goes down. It's these emotions that can be your greatest enemy, because they can cause you to act and sell your stock, when it is better to just sit tight and be patient. But the DGI investor knows, yes knows for certain, that given time, a portfolio made of quality companies that increase their dividends year after year will give excellent long-term results. And therefore, these investors are much less likely to be swayed by either stock market or individual stock volatility.

Be patient. Be wise. And enjoy the results!

Thank you for reading my article. I welcome your comments and criticisms.

Disclosure: I am long APD, JNJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.