Time for guide #2 to the blog. This post lists what I think is a good introduction to dividend investing and some of the nuances behind it. Enjoy!
- Core strategy: dividend investing – why dividend investing makes up the core of my investment strategy. Simple really. Better long term returns.
- Dividends; the great bear market protector – the 2nd best reason for dividend investing. Dividends protect your portfolio in down markets and actually enhance returns due to reinvested dividends.
- Yield on cost; a critical dividend metric – how dividend growth leads to rising returns over time and how to calculate that return.
- Dividends account for 80-100% of world wide stock returns – dividends are an even more important to total return in markets outside the US.
- The magic dividend formula – throw out all those complex valuation models. Calculating expected returns for dividend stocks is easy.
- The power of dividends – a further dive into why dividends provide better returns. Not only due dividend payers return more than non-payers but dividend growth stocks provide higher returns than dividend stocks that don’t grow their dividends.
- The commutative property of dividends – a look into the often heated debate between higher yielding dividend stocks versus stocks with lower yields but growing dividends. In short, it depends on your goals and they type of investor you are.
- Timing high dividend stocks doesn’t work – market timing strategies like those based on the 200-day SMA work. They work for indexes and for dividend ETFs/high yield ETFs as well. However, they don’t seem to work for individual high dividends stocks.
- The importance of valuation for income investors – income investor often ignore valuation. They get caught up in the dividend yield and dividend growth. But dividend stocks can and do become over valued and thus valuation is an important topic for income investors.
- Dividends – a better retirement model – a retirement model based on dividend income is superior to other retirement models
- The dividend hammer – bonus. I couldn’t keep the list at 10 posts. I really like this post. It drives the point home on dividend investing.
And that rounds it out. There are other posts on dividends on the blog. Search on dividends or go to the dividend page on the blog to see all the posts.
8 Comments
Mark · February 4, 2012 at 4:41 pm
Paul,
I really appreciate the effort you put into these reports. It’s sort of amazing considering that you could be just sitting there watching another glorious sunset and enjoying another glass of wine instead. I’m not a total slug but I’m thinking that’s what I’d be doing.
Anyway, one comment considering YOC or Yield on Cost. I think the metris can be deceiving in a way. Sure it’s nice to see the figure go up and especially so when you have capital appreciation to boot but I question holding such a stock at it’s current yield if there are better opportunities available. Yes it all depends on the stock(s) in question but one shouldn’t allow themselves to become frozen in place if a better opporunity presents itself.
I struggle with it myself. A good example is the McDonalds stock I bought back in 2003 at $13/share. It’s current yield is about 2.80% while my YOC is kissing nearly 19%. There are a handfuly of MLP’s out there wherein I could double or triple my current yield and be nearly as happy but other than that I have no compelling reason to sell MCD. However I do think about it a couple of times a week. Oh well.
Thanks again, Mark
libertatemamo · February 5, 2012 at 12:10 pm
Mark, don’t worry. I do quite a bit of chilling out and enjoying the RV life 😉
You raise a great point and touch on a very tough decision for an investor. When to sell? I do agree that YOC can be too much of a crutch and used to justify holding an investment that is no longer worthwhile. While I keep track of YOC, when making decisions on current allocation I use future expected total returns vs YOC. So that’s current yield plus future expected dividend growth plus future change in valuation. Using current yield alone I don’t think is adequate. Last year based on total returns I swapped out of NGG for better opportunities because I thought it became overvalued. I also swapped out of ETP for more KMR (here’s a case where my stagnant YOC also told me to get out) because there was no dividend growth for 2 yrs and I got tired of waiting for the turnaround. In your MCD case I’d try to compare total expected returns for my list of opportunities.
One thing I do try and keep in mind is that momemtum is very strong in companies and markets. Winners tend to keep winning. Also even more important is that investors tend to sell winners too early and keep losers too long. Many studies have shown that stocks that investors sell tend to perform better than those they keep. Its much better to reallocate from losers to new future potential winners than to trim winners. For example, prob the best decision I’ve made several time in the last few years is to keep my EPD position and keep adding to it even though several times I’ve thought its overvalued, or ‘it can’t keep going higher’. Well it has. EPD is knocking the cover off the ball and continues to do so. A lot like MCD I think.
Anyway. Food for thought.
Paul
Mark · February 6, 2012 at 4:34 am
Interesting, an oddly enough I share the EPD conundrum as well. Lately I’ve been allocating new resources to KMI however (can’t figure out what attracts you to VNR).
You’re absolutely correct with respect to people selling their winners too early and holding on to their losers. It took awhile for me to accept or come to grips with that myself. I suppose it has to do with our desire to not lose but I’ve learned that that’s not going to happen in the investment world and it’s better to lose a battle rather than the war.
Anyway thanks for the tip on looking at total expected future returns. It’s a good way to play with the numbers.
Mark
libertatemamo · February 6, 2012 at 9:23 am
KMI is a screaming buy. About 16% expected returns from here plus some upside in valuation I think. I’ll be adding more on dips. My guess is once the EP acquisition goes through, they sell the E&P business and do the drop downs to KMP it will really take off.
VNR is a trade for me. At 6 times EBITDA its undervalued and I get paid 8.3% to wait plus I’ll get 5% div growth this year. The market doesn’t get that with its recent acquisition its gone from being a nat gas play to more of an oil play (70% oil now) At $33 I’ll be out. Target hold time is 1 year.
Paul
Steve · February 11, 2012 at 1:51 pm
I find your analysis interesting to read. Often though, I question if it’s worth it for anybody to spend their valuable time trying to beat a well diversified index portfolio. I think a guy like Rick Ferri is spot on. Short term, maybe it works but history overwhelming shows individuals won’t do it. Bonds have beaten stocks over the last 10 and 30 year time period. That just screams to me to stay invested and diversified because no one’s forecast for the markets or individual stocks is consistantly right. You seem to really enjoy doing it so have fun and best of luck.
libertatemamo · February 11, 2012 at 6:10 pm
Steve, I agree that most active investors won’t and can’t outperform a diversified index strategy. But also most investors can’t even outperform a diversified index even when that’s what they are trying to do. Behavioral issues, like the tendency to buy high and sell low, dominate investor returns regardless of the strategy and asset classes invested in. This is still the most ignored issue in finance. As I’ve stated many times on the blog, for 95% of investors I recommend the IVY timing portfolio which is a diversified index portfolio but enhanced with a mechanical strategy to prevent the behavioral issues.
But I strongly believe that certain investors, that 5%, with the right skills, technical and more so behavioral, can trounce a diversified portfolio. My approach is based on dividend and income based investments and that approach enable me to retire at 40. And that is what I’m trying to show readers how to do. So far for me so good. Only time will tell. As Yogi Berra said, ‘its hard to make predictions about the future.’
Paul
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