Introduction:
I do not claim any ownership of the investment strategy, known as Dividend Growth Investing, but I do claim to be a proponent of the strategy and have used it during most of my investment life.
What seems like a long time ago, I wrote my first article, "10 Commandments For Dividend Growth Investors."
Those "commandments" are as appropriated today as they were back when I wrote the article in 2011.
What You Should Know:
I recently came across two articles about Kraft Heinz (KHC), which discussed the recent divided cut and where the company might be headed in the immediate future.
You can find the articles here and here.
The thing that I found interesting about these two articles, is that for some reason, they were both put in the "dividend" section of Seeking Alpha. One was in the "Dividend Idea" category and the other was in the "Dividend Strategy" category.
But as a Dividend Growth Investor, neither of these articles, nor the Kraft Heinz Company (HNC) have any business in a "dividend" section.
There are basically three types of common stock:
1. Stocks that pay no dividend at all. (We often refer to these as "growth stocks")
2. Stocks that pay a dividend. (We often call these "dividend paying stocks")
3. Stocks that increase their dividend annually and have done so for at least 5 years in a row. (We often refer to these as "Dividend Growth Stocks.")
What I Know:
As a DGI, a company like Kraft Heinz is of little or no interest to me. How come? Because Kraft Heinz is not a Dividend Growth Stock, but is a stock that happens to pay a dividend.
That makes it less than attractive to an investor who uses the DGI strategy, as I do.
But, that does not prevent me from making a purchase of a stock that is not a DG stock for the express purpose of achieving a capital gain. Give you an example.
Back in 2016 I decided to write a series of articles about The Perfect Portfolio (a taxable portfolio) that I had begun funding in 2009, but had not added any new money to the portfolio since our last purchases in 2011.
We had a sale of a house and decided to use a portion of the proceeds to invest in the taxable account as well as our other investment vehicles. One of the companies that struck our fancy was Western Digital (WDC).
Now, this company is not a DG company, but is a company that "pays a dividend." But at the time we made our purchase, the stock was a tremendous value, relative to our fundamental valuation metrics. So we bought shares at $43.25, in April of 2016.
I wish I could tell you that we sold our Western Digital when it reached $100 a share, in 2017, but we didn't. We did sell at $88.65 on September 12, 2017 and locked in a 100% gain.
Getting Back To Kraft Heinz:
There is nothing to like about this company. Some would say that with the price decline, the stock represents a "value."
Here's something to consider. A stock's price does not always represent a value. Price and value are not the same thing.
A company that cuts the dividend, usually does so because there is a problem with the company, relative to earnings. The company needs to retain the money that they would have distributed to shareholders in the form of a dividend, so they reduce the dividend and pocket the savings.
They don't do that because things are hunky dory at the company. They do that because the s**t has begun hitting the fan and as they said in the space movie, "Houston, we have a problem."
Wishful thinking has destroyed more investors than just about anything else. We want to believe so badly in a given company that we fail to really look at what's going on.
One commenter, when someone suggested that he read analyst narratives on KHC said, "I don't trust analysts."
You don't have to trust them, because some of them will have nice things to say about a company and some of them will have negative things to say about a company.
There is "truth" to be found, somewhere in the middle.
Never forget this. You don't NEED to own any stock. You don't NEED to be in a hurry to get on the train. The train is not leaving the station and you standing there holding your luggage.
Preservation of capital means taking a second, third, and fourth look at a company before making an investment. When you find one valuation metric that gives you hope, look at the other six valuation metrics that tell you this one's a dog.