This article is inspired by a question I recently received from Rebecca Corvino, the new Dividends & Income editor for Seeking Alpha. She has taken over the Dividends & Income Digest series, and she posed this question to me for her next Digest: Who are your dividend investing mentors, and what have you learned from them?
I began to jot down a few ideas and quickly realized that Rebecca's question could be the foundation of an article. I love having the chance to give credit to some of the people that have influenced me on my path to becoming a better dividend growth (henceforth, DG) investor.
My "aha" moments along my journey came when the concepts not only of dividend income but of enough income, income reliability, and income growth merged into a single coherent view.
My first introduction to DG investing, believe it or not, came from promotional ads for newsletters or pamphlets, like "Create a Never-Ending Stream of Growing Income" or "You Won't Believe This Perpetual Cash Machine." These were hype, of course, but that's what first got me started thinking about dividend growth investing.
My investigations since then have led to a variety of influencers. I have learned from scores of individuals along the way. With apologies to those I leave out, these are the people that have had the most influence.
David Fish (here he is on Seeking Alpha) created and maintains the Dividend Champions, Contenders, and Challengers [CCC] spreadsheet. I have watched that grow from his initial efforts in 2008 to its current form, which covers 768 stocks with 97 columns of information for each stock.
David updates the document each month and offers it to all of us for free. That is incredible.
I learned from David many important concepts and data points, but the most important is probably the power of keeping facts straight and not drawing unwarranted conclusions. David's work is 100% fact-based (except for his views on Spam®).
David, working as an individual, runs rings around highly respected organizations in providing timely, accurate information on DG stocks.
Since he understands dividends so well, he curates the data when algorithms would lead you down a path of misinformation. For example, when a company accelerates a dividend from next year into the current year, algorithms would display a huge annual dividend increase followed by a dividend cut the following year.
David knows that is not a dividend cut, but algorithms don't. So he puts this note into the spreadsheet where appropriate.
I consider the CCC to be the most valuable source for dividend growth information.
Chuck Carnevale (here he is on Seeking Alpha) is "Mr. Valuation." His F.A.S.T. Graphs are another essential tool for me. I interviewed Chuck in 2011: "Interview with Chuck Carnevale: Why Valuation Matters for Buy-and-Hold Dividend Investors."
Chuck's great insight was to plot valuations on the same graph as price. When you do that, you can see at a glance when stocks are overvalued, fairly valued, and undervalued. Most readers are familiar with F.A.S.T. Graphs by now, like this one:
Chuck is a prolific author. He has explained and illustrated many important investing principles, including the power of compounding and the idea that "it's a market of stocks." In other words, even though "the market" may be overvalued, that does not mean that every stock is overvalued. It's the same idea as discussed below about the logical fallacy of attributing the average characteristics of a group to every member of the group.
Ned Davis Research
I cannot afford to buy its stuff, but Ned Davis Research has been running an ongoing study since 1972 that compares the returns of dividend-raising stocks to plain dividend stocks and non-dividend stocks. Its results reinforce the efficacy of DG investing.
NDR allows reporters access to some of its data for articles (free advertising) several times a year, and various brokerages use the data in their own analysis and publish the results. That's how someone like me gets access to some of NDR's data. Here's an example of what you can find:
For an array of charts like that, simply Google "Ned Davis dividends."
From NDR, I learned about the basic long-term performance superiority of dividend-raising stocks. That is, of course, regarding stocks in groups or categories as opposed to individual issues. The main point is that you do not consign yourself to inferior returns by selecting dividend growth stocks. Indeed, your returns will often be superior.
Mike Nadel (here on Seeking Alpha) will probably be surprised to see himself mentioned here, but I feel a kinship with him, even though we have never met. We both come from non-financial fields, write articles that attempt to explain rather than direct, and feel that dividend growth investing fits our personalities. Oh, and we both like to play poker (I think he is better than I am).
Mike is probably most famous for his Dividend Growth 50, a portfolio that he created after polling a number of Seeking Alpha authors about their "best" dividend growth stock ideas a couple of years ago. He plunked $25 grand of his own money into the DG50, and he is running it as an ongoing experiment in extreme buy-and-holding. He reports on it periodically. Here is his latest article about it.
I like ongoing portfolios; I think they are much better learning tools than back-tests, although obviously they take longer to play out. The best insights are not available for years.
One of the things I have learned from Mike is how to strike a good tone in explaining things and in responding to critics who are sometimes sarcastic and condescending. Also, Mike brings a different spin to some DG concepts, such as emphasizing more growth than I might, and I have been influenced by his approach.
When I first began writing about dividend growth investing, I was stunned to see how many professionals came out as vocal adversaries. I had no idea that dividend growth investing was considered to violate basic investing concepts or to be a crutch for the ignorant. It was eye-opening to see solid individual investors derided as cultists and zealots.
You might wonder how such negativity could count as "mentoring." For me, it led to more research and to tightening up my own thinking. When I research and write, I learn too - that's one reason to do it.
The professional opinions were usually based on Modern Portfolio Theory, so I studied MPT and eventually wrote a primer on it in the context of "smart beta" factors.
Over time, I realized that a couple of concepts in MPT make it difficult for its adherents to think positively about dividend growth investing. The first and most obvious is the dividend irrelevance theorem. If you start out presuming that dividends are irrelevant - treating that as fact - then logically you will also believe that dividend growth investing must be misguided.
When I tried to discuss DG investing in comment streams, critics would often shift the discussion to high-yield investing, as if they are the same thing.
They are not the same thing. As best as I was able to discern, academics sometimes treat yield as a valuation indicator, so the higher the better. That leads them to assume that DG investors were automatically high-yield investors - that is, only interested in the highest-yielding securities.
But the fact is that most dividend growth investors do not look at things that way, and indeed we understand that many of the highest-yielding stocks are problem companies, at high risk. Many DG investors consider the "sweet spot" to lie in the 2.5%-to-5% range.
Studies invariably show that the best performers do not come from the highest-yielding decile but from the next couple of deciles down from the highest. Here is a typical illustration of that.
Finally, I learned from dealing with critics the logical fallacy of attributing group behavior to every member of the group. Many academics and theorists, especially with the rise of behavioral finance, have come to describe everybody by group averages.
This is simply illogical. Every investor is not like the average investor, just as every stock is not like the average stock. Investors are individuals too. They array across a wide spectrum of skills, abilities, and behaviors.
When I put together my primer on MPT, I used it as a platform to describe "factors" that academics have identified as producing superior returns. Ploutos is an SA author that comes at the same subject from another direction: He has written several articles about ETFs that regularly beat the market.
It turns out that most such ETFs are based on factors too. But being non-academic, Ploutos has no bias against factors that do not have the academic imprimatur. Thus two of his superior ETFs are based on dividends and low volatility, which are not academically recognized factors. However, they match two factors that DG investors look at all the time.
But most of Buffett's stock investments are in dividend-paying (indeed, dividend growth) companies, and with his wholly owned companies he constantly extols the virtues of creating vast cash streams flowing to headquarters that he can then reinvest.
That is exactly the business model of many DG investors: Get cash from your investments, reinvest the money, and compound it for years and years. My headquarters is simply my brokerage account into which the dividends flow.
I like to read Buffett's letter to shareholders every year. He almost always includes a section on general investment principles, and if you put them together over the years, you get a coherent approach to selecting investments: Buy great businesses at reasonable prices and let them work for you. He has also been consistent about basic concepts like tuning out noise and focusing on the long-term picture.
There are others from whom I have gained knowledge and insights, and I would like to mention them here, in the hope that readers will look them up. Not all are specifically involved in DG investing, but every one has influenced me along the way.
- Benjamin Graham (The Intelligent Investor: The Definitive Book on Value Investing)
- Brian Bollinger (Simply Safe Dividends)
- David Crosetti
- Bob Wells
- Richjoy (good insights into investing for growth + income)
- The Part-time Investor
- Dividend House (interesting approach to DG portfolio construction)
- Adam Aloisi (always thoughtful and usually a little off the beaten trail)
- The Myth of the Rational Market (Justin Fox)
- Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (Nassim Nicholas Taleb)
- Common Stocks and Uncommon Profits (Phillip A. Fisher)
Disclosure: I am/we are long MCD.
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.