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Having Multiple Investing Strategies Pays Off

|Includes: Apple Inc. (AAPL), CVX, JNJ, KO, T, UTX, WMT


Is DGI, total return, value investing, or indexing your best option?

There has been a lot of criticism of the dividend growth investing strategy here on SA recently. It got me thinking about the path I chose over the years.

Each type of investor sees what they want to see and that is so obvious here on SA. Each side needs to look at the other for possible tips/best practices. The bickering back and forth is not productive (I admit I've gotten caught up in it). If you haven't tried a certain investing approach you might want to hold off on criticizing it. Experience trumps reading about it online.

I don't mind baring all and using my personal situation to illustrate that each investing style has its benefits (and I'm sure bad points too). Having multiple strategies actually worked in my case.  

Over the years (since 1982), due to various circumstances (some beyond my control) I adopted an "all-encompassing" strategy which uses elements of several tactics:

1. In my 401k I can't buy individual stocks (except for my employer's, United Technologies Corp. (UTX)) so I opted for an index fund strategy. I own SP500, international, small cap, and stable value fixed income funds which now comprise nearly 3/5 of my total assets. I probably averaged a 15% savings rate over the years. Not including the tax benefits or the company match (3.6% of my salary) I've probably averaged a 7%-8% compounded annual gain on my investments (about 12% from the stock funds). Throw in the tax/match benefits and its probably much higher. I highly recommend that younger investors take advantage of tax-deferred vehicles such as 401k, 457b, and traditional IRA, especially if there is a company match. A 40-50 year period with deferred taxes on some earned income + investment gains is like gold. I'm not sold on Roth IRAs yet. Sorry DGI'ers -- recommending not investing in a 401k and instead buying DG stocks would have cost me lots of guaranteed money. 

2. Extra money (that didn't go into the 401k) went into the Peter Lynch Magellan fund starting in the mid-1980s. I sold that in the early 1990s. I think I averaged about a 20% annual gain on my money there. Sorry fans of buying only individual stocks --- sometimes it pays (literally) to invest with successful, professional money managers. 

3. After reading up on the strategy I subsequently invested the proceeds from the Magellan fund into DG stocks (and added more over time) as I realized I would need additional income (besides my pension + SS) when I retired. At the time the S&P had just developed its Dividend Aristocrat list (but it was very controversial at the time). My rationale was that individual stocks usually have higher yields and grow the dividend much faster than the typical index fund. My goal was to retire "early" at age 55 in 2014 (which I achieved) and I needed a growing income stream since my pension was fixed. Over the years I bought (and mostly held) blue-chip, gold-plated large caps, think ATT (T), Chevron Corp. (CVX), Coca-Cola, Inc. (KO), Johnson & Johnson (JNJ), Procter & Gamble (PG), Wal-Mart Stores, Inc. (WMT), etc. This DG portion has grown to about 20% of the overall portfolio and provides about 1/3 of my investment income (the stable value fund in my 401k and 2 bond funds provide the rest). My investment income more than meets my retirement living goals so far and is growing at a robust rate of 11%-12% per year due to dividend growth, reinvestment, and new investment. Sorry DGI opponents -- I highly doubt you'd be able to get a 12% raise every year just by selling stocks (and maintaining your portfolio size) or buying bonds. And sorry to value investors -- a low P/E doesn't imply a sound DG stock investment.

4. Through the years I made the occasional "growth" stock pick. By far my most successful pick (and still paying off) has turned out to be Apple, Inc. (AAPL), which now is my largest individual position. A bonus is that the company recently resumed issuing dividends and AAPL is my largest dollar payer. I don't consider AAPL as part of my DG portfolio (yet). I've generally made money on most of my "growth" stock picks. When I didn't I sold the position (after at least a year) and used it for tax loss harvesting which had the effect of further boosting my overall return. DGI and value investing fans -- you might want to devote a portion of your funds towards the growth side. 

Disclosure: I am/we are long AAPL, PG, UTX, KO, JNJ, WMT, CVX.