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Dividend Growth Investor: No, We Don't Ignore Price


I don't know about you, but sometimes I get worked up about things that I really shouldn't get bothered about. Recently, I read another article about why Dividend Growth investing was not going to be a successful strategy, moving forward. Here's a link to that article:

My thought after reading the article was, "Well, here we go again." The author makes the argument that Dividend Growth investors, who ignore share prices, will see limited income and returns in the next 5 years.

The basic premise of the article seems to be that stock prices of the more traditional Dividend Growth stocks are at 52 week highs, have PE multiples that are also at historic highs, and have limited growth opportunities moving forward. Cyclical stocks, priced at 52 week lows would seem to offer a much better investment for everyone, including DG investors. The author uses, as points of illustration, three companies: Procter and Gamble (NYSE:PG), Altria (NYSE:MO) and AT&T (NYSE:T).

But his very premise contradicts his argument. He says that DG investors who IGNORE share prices will see limited income and returns in the next 5 years.

Here's What I Know:

Dividend Growth investors DO NOT ignore price. When you read the articles and comments of DG investors, price points are a regular topic of discussion. Why? Well, first off, DG investors are looking for what? Dividend Growth.

That means finding a company that pays a dividend and has done so for a long period of time. It means finding companies that have a history of increasing those dividends. It means finding companies that increase those dividends at a faster rate than inflation. And it means reinvesting those dividends back into the stock position (or using dividends to purchase additional companies).

I probably don't need to tell you, but I am long on all three of the companies that were mentioned in the article in question. They have served my investment strategy well, over the years and have met the criteria that I've outlined above.

But, am I a buyer of these companies today? Well, not really, but I did add to my position with PG on 6/21/2012 at $59.75 a share, when the company announced earnings that did not make "the street" very happy. To be perfectly frank here, I wish I would have purchased more shares than I did, because right now, those shares are priced at $65. At the same time, the YOC for that purchase put me at 3.75% and I am very happy with that dividend moving forward.

On the other hand, I have not added to my positions with Altria or AT&T since my last additions to my portfolio. I made a purchase of additional shares of back in January of 2011 at a price of $29.55 a share. At that time, the dividend was $1.72 a share and at the purchase price that was a 5.8% YOC.

My last purchase of Altria was on 9/9/2010 when I added to my existing position at a price of $23.50 a share and the company was paying a dividend of $1.52 a share and at the purchase price that was a 6.4% YOC.

Why have I not added any more to my positions? The reason, for me, is very simple. At their current prices, T and MO do not currently have my attention. Because I expect a certain yield point from both of these companies, at their current prices, they do not meet my expectations/criteria to add more to my existing holdings. Pure and simple. So, I guess for me, at least, "the price MUST matter." How about you?

What You Should Know:

When you read the "gurus" of Dividend Growth investing, the underlying theme of their articles is all about finding a value price, relative to the intrinsic worth of the company. David Van Knapp, David Fish, Chuck Carnevale, Norman Tweed, Robert Allen Schwartz, always discuss value pricing.

Time and time again, these authors have advised their readers that sometimes, "doing nothing" in terms of making new purchases is often a good idea. Why? To limit downsize and maximize your income stream from the purchase you are making by not being to eager to own something at a less than "value" price.

Articles that take a contrary point of view to Dividend Growth investing serve a purpose, but often times, these articles tend to lump DG investors into a group of people with absolutely no concern about how much or how little they are willing to pay for a particular company. That is just not the case.

Many times, the authors of these articles are not proponents of Dividend Growth investing and are actually trying to make the case that you should not be a DG investor as well. Why? I really don't know. Maybe DG investing is too simple. Maybe it's not exciting. Maybe it tries to take the gamble out of investing. Whatever.

DG investing is one strategy. It is either a large part of an individual's strategy or it can be a small part of an investor's strategy. Like in my previous article, "Can A Dividend Growth Investor Be A Trader" (link, a DG investor is as free to be a trader or an investor, as he or she sees fit. After all, it is your money and you can do whatever you like with it, as far as I know.

You Can Take This To The Bank:

Every stock you purchase is going to go up in price. By the same token, every stock you buy is going to go down in price. It is what it is. If you look at a chart-say a 10 year price chart-for any company of your choosing, you will see that very few companies go "straight up."

One of my favorite companies, besides KO, is McDonalds (NYSE:MCD). Let's look at a 10 year chart:

(click to enlarge)

Now that's pretty impressive growth and the dividend has increased making MCD a very nice long term hold for many DG investors. Along the way, MCD has provided investors with many opportunities to purchase stock in the company at very attractive prices and yield points.

Let's look at the chart for Altria :

(click to enlarge)

Altria has done very well from 2003 through 2009 when it pulled back with the rest of the market. But, since that time, the company has been on a roll. A buy and hold investor would be doing very well if he purchased a position in 2003. Like MCD, MO has provided investors with many price points that were extremely attractive, over the last 10 years.

Procter and Gamble Chart:

(click to enlarge)

Similar to Altria, PG has a very nice run 2003-2009 when like many other companies, the market correction hit. But a buy and hold investor from 2003 would be doing very nicely today. For many who purchased PG in 2008 and 2009, you might argue that the price of the stock then was high. Without looking at the price, relative to the PE Ratio for that time, it is impossible for me to address that. But, I would venture to say that PG, when it was over $70 a share in 2008 and 2009, the PE Ratio was more than likely at an all time high.

AT&T Chart:

(click to enlarge)

Now this chart looks interesting. A big spike up 2006-2008, but T came back to earth with the market correction. It has also recovered well. Again, I would surmise that T, in 2007 and 2008 was pulling in a historically high PE Ratio.

Summary and Conclusion:

It seems clear from the charts of all four companies, that investors who want to ignore price points and who purchase stocks without looking for value are going to be buying on the high side. On the other hand, investors who are patient will find opportunity price points every year with just about every company we can look at.

It is disingenuous to suggest that Dividend Growth investors do not care about stock prices and that DG investors will not have success in the next five years.

When we consider that market corrections/stock price fluctuations happen all the time, we can better deploy our capital to solid, Blue Chip companies and prosper quite well from not only a price appreciation, but from growing dividend streams as well.