A case for dividend growth investing

Investing directly in the stock market is a risky thing, and it can be quite scary for the individual investor, indeed. In my quest to DIY, I am on the hunt for returns (higher than inflation) while mitigating risk as much as possible. That may sound like an oxymoron, granted; I am investing directly in individual stocks! To compensate for that, I am looking towards dividend paying stocks. Preferably, even dividend growth stocks.

The difference between the two approaches is a stock continually paying the same amount of dividend over a long historical period of time vs a stock also continually paying a dividend over a long historical period of time, yet that dividend amount rising along the way (growth).

Keeping up on the strongly recommended reading on the vast topic of stock investing, I ran across this very interesting and chuck full of content article on SeekingAlpha. A personal experience story and affirmation why a dividend investment strategy may be the strategy for the DIY investor over the long run. The embedded links in above article just adds to the learning opportunity!



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Do It Yourself Investor – Community

You probably have caught on by now, the intent and purpose of this blog is to document the journey of investing – do it yourself style.

While the initial thought of that can be quite daunting and even scary, as with everything that one sets out to learn or dig a little bit deeper on, the first step is the hardest and scariest. With a little bit of determination and zest, and plain old curiosity, the elephant in the room starts to get smaller and smaller; at some point, you may even be able to move him out of the room and allow him to roam your house just like the dog and the cat already do.

What I really want to emphasis though, is the need (yes, the need) and commitment to keep at it. The only thing constant about investing is — constant change. Stick with it!

Rest assured, this does not mean you have to go it all alone, all the time. There are quite a few like minded communities out there, yet, there is some effort needed to find just those like minded communities. Find one that fits your needs and style and goals when it comes to investing. And: contribute, decide to be part of it, get active and share your thoughts!

Personally, I get a lot of good stuff out of this one. Good discussions, some controversial thoughts (we are talking investing after all) and also inspiring success stories!

DIY – Dividend Investors Club – Parsimony Investment Research


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Some hard and fast facts on performance

Something a little bit more hard core – for the brave out there!

Very number based read, yet, for the ones into it, a little bit of reinforcement and validation of the “Dividend Income” path less travelled.

SP500 Dividend Aristocrats Index Fact Sheet – February 2014

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How to – evaluating Dividend Paying Stocks

Good morning,

Looking out the window today, everything around is covered in fog, visibility is down to almost nothing. Leaning back, sipping on my coffee and starting to read a bit. After a while, the fog is starting to lift, and bit by bit, things take on a clear outline.

The same can be said about the decision to invest. Initially, everything is covered in fog and it is hard to find your way around it. Don’t despair, just pick a starting point and keep at it. The fog will begin to lift!

Finding listings of dividend paying stocks assembled by someone else and sent through the elusive analysis machine already, look great, hold great promise. Yet, when it comes down to it, does the evaluation performed make sense for your goals? Is the applied logic consistent and applicable? Why did this party apply the factors and benchmarks they did?
All good, rather great, questions! Questions that need answers for you to make up your own mind whether the compiled information at hand has any merit for yourself.

In my self-education endeavors, mostly on ‘Seeking Alpha’ (great resource site!), I ran across the below article (in a series). While for me personally, some of the stock choices and their respective slotting in the ranking does not make sense for my investment strategy, I found the approach employed to develop the ranking quite interesting. And most definitely a worth while exercise for anyone learning how to evaluate stocks on their own!

Dividend Growth All Stars – Parsimony Investment Research

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How to – covering the basics

I thought I would intermingle a short post to talk about covering the basics.

Once you made up your mind to begin your own personal investment journey, where to start??

To get acquainted with the topic and gain initial overview of what is out there, terms and terminology, visit The Motley Fool. Great site for beginners and advanced investors alike!

Once it is time to get more into the nitty gritty and finer points of stock picking, evaluations and trading concerns, visit Seeking Alpha. Very active community of various authors with lots of background, insight and experience.

Happy reading!

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Finding our stock ticker

Hello class, nice to see you back.

To quickly recap our strategy from the last post:
a) dividend yield greater than current market rates (banks, CDs, etc.)
b) either stable or increasing dividend payout over the last 5 years
c) stock price between $20 (high) and $5 (low)

Which filter did you end up using? Have a favorite site you want to share with the class? Post them in the comments section below.  One of my personal favorites is The Google Stock Screener : clean, relevant criteria and easy to use. Another one is Dividend Stock Screener . It is an advanced screener focusing on dividend paying operations out of the gate, with handy and straight forward criteria to quickly narrow down the field of possible contenders.
Find one that works for you and your information needs!

ok, running a number of filters still returns a relatively large field of players. Remember the previous conversation about Dividend Aristocrats? Taking a closer look at those contenders one more time may help us to whittle things down a bit.
Cannot say it often enough; as we are looking at those various lists, always remember that it is real money we are playing with. If you are not entirely comfortable with a possible worst case scenario of losing all the money set aside for this project, take a step back, breathe and re-consider.

On with the program then. Out of the possible players, are there any companies that strike your fancy right off the bat? Are there any industries you have some keen insight into, can that be parlayed into our stock picking endeavor? Any industry you just have to stay away from? Some individuals translate philosophy into stock picking, such as staying away from alcoholic beverage producers or tobacco companies on general principles.

The above should be understood as a very personal stock screener. No sense in investing some of your hard earned money if you do not support the business model or product being sold. Incidentally, this does also remove some of the possible players as well. Good for us!

Once the gut feeling has been catered to, let’s focus back on the actual hard and soul of stock picking: the financials. Despite our incoming basic criteria above, we still need to analyze our smaller universe for sound financial principles and operating margins. One of my personal ‘hybrid’ criteria is an annual dividend payout amount of $1 minimum / share. There is no scientific reason or empiric research that advocates this criteria; at least, I am not aware of it. Placed in relation to the share price, I find it to be a measure that simply speaks to me (yeah, I know, bring it on!)

Common financial lore recommends to stay away from stock with a double digit dividend yield, as it may indicate serious priority issues within company management, such as focusing on shareholder return too much neglecting investment opportunities. It could also point to a serious hike in debt level or the (in-)ability of servicing such. Again, we need to narrow down our contenders while still paying close attention to the financial benchmarks.

How small is your universe at this point? Manageable or still in excess of 100 stocks (Dividend Aristocrats and any contenders obtained through your favorite stock screener tool)?

Post your thoughts, status and questions below; would love to hear about your experiences on this journey.

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Strategy – Final Steps

Happy New Year!

Part of your new year’s resolutions should have been to actually read up on the suggested links below from our last discussion. Yes, seriously!

Building on the concept of dividend paying stocks, preferably stocks that continue to increase their respective payouts over time, we will go through the Dividend Aristocrats and DRIP listing to narrow down the possible investment choice for our initial seed money. Yes, that still sits in that nifty only brokerage account of ours, and is not really doing much of anything just yet.

The screen requirements or filters for our exercise here will be as follows:

a) dividend yield greater than current market (banks, CDs, etc.)

b) either stable or increasing dividend payout over the last 5 years

c) stock price being $20 and below (and having stayed stable over the last 2 years), yet higher than $5

The above filters should eliminate quite a few of the contained stocks, including the really boring staples, where it would take a significant initial investment amount in order to have a return above inflation in real dollars. Remember to always keep an eye on both the relative yield (percentage) and the actual return (in real dollars). If only focusing on the percentage value, it can be rather misleading should you choose to “cash out” the return for some real world benefits.

The above should also eliminate the stocks that exhibit a significant amount of imbalance, fluctuating up and down frequently. While we are in the game for a solid return, we are not in the game for risk beyond tolerance. Others could argue that capping the price at a maximum of $20 invites just such intolerable risks (we are planning to invest directly into individual stocks); that is a true statement to a certain extent, yes. Our underlying philosophy is inherently risky, and more so than investing in mutual funds or large institutional offerings. If any such lingering questions remain, please go back and review the very first article in this series!

Stock prices below $5 / share mark are indeed not on our radar. Stable prices between $5 and $20 could (notice the conditional) signal that a company may have a sound business plan and financial footing, yet in a less attractive or growth oriented category. Think the large Telco trying to stave off the landline decline, or public utility companies. At first glance, not really an attractive business model, yet from a financial perspective, there may be quite some interest. Historically, such operations are throwing off their cash cow profits back to the shareholders, as there is not much profit opportunity by re-investing (relative to other factors).

Rather than rambling on about pros and cons, let’s start looking at our potential candidates and start weeding out the ones we don’t like.

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Strategy – continued

In the last post we touched on how to best find investment candidates. Not just via a simple throw the dart approach, yet using a strategy that provides both income growth as well as stock price appreciation. Remember, the dividend approach?

In the vast digital realm, a lot of (very smart) people have already written myriads of articles on dividend growth strategies of assorted flavors. The more I read about that kind of strategy, its benefits and potential upsides, the more I am starting to think this is the way to go for our hypothetical investment portfolio.

A company that pays a dividend is well established in the market and has been around for quite a while; thus, it would be unlikely for it to go bust unexpectedly. Its products can usually be classified as every day staples (some might call that ‘boring’ from an investment perspective) or infrastructure companies. Good examples would be Procter & Gamble, or your local utility company or phone company. Just because a company has been around for a long time, we should also look at the company’s plans to stick around in the future. Given the accelerated developments in say the telecommunication market, a traditional phone company simply focusing on landline phone service may not have any chance to make it to the next New Year’s eve party. So we should ask questions such as how the business model will stay in touch with the Internet Age, the cloud hype and the large amounts of data being piped through old copper wires to your home smart TV?

A well established dividend paying company usually also has a fairly stable share price without a lot of sever up and down movements. Over time, that share price though may have climbed and climbed to lofty heights beyond the $50 mark. An example there would be Procter & Gamble. Very stable, very good product portfolio, very good investment choice for the P&G employee (let’s forget the Sox regulations for a minute) in either a stock plan or even a 401k account. Yet, we are trying to start out in the investment world and are interested in a little bit more of a return than maybe $40 / year.

So a possible add-on to this conversation is dividend growth over time. What is that? Well, simply explained, it is the company raising the real money amount being paid out per share over time. For instance, initially, the company pays $0.10 / share for the first 4 quarters; due to good business development and revenue growth, the company decides to raise its dividends from $0.10 / share to $0.15/ share. That is a 50% increase in payout amount!! Calculated at the end of that fiscal year, we, as investors, would have received $40 / Y1 and $60 / Y2. Nice! Not really anything that would allow us to quit our day job, yet nothing to sneeze at either, given the statistical (percentage based) development of our stock choice.

An added bonus in this context is the falling cost basis for our stock shares in this investment. As we continue to hold this stock and accumulate its dividends, our real money basis only goes up (we are re-investing any received dividend payments!), our number of held shares also goes up. Yet the stock price itself does not necessarily move that much. Without going into too much detail (as there are full time paid number crunchers for this mathematical nightmare), our cost / share over time decreases. Don’t expect any large decreases by any means, yet after several years of following this strategy, it is quite noteworthy.

Should our stock (against all odds) take somewhat of a dive (think financial crisis of 2008 / 2009), our holdings in the stock are somewhat insulated from that large price drop. How do we figure that? Well, let’s take a little bit of a closer look: we continue to buy and re-invest stock of company A over several years. On occasion, the stock price is somewhat higher, on occasion it is somewhat lower; due to continually buying, we exercise the concept of dollar cost averaging. Over time, despite fluctuations, our cost of stock remains somewhat stable, possibly even trending down (below actual market price). Hence, the longer we stay invested in a given stock, the less pain we would experience if the actual market price dipped (for a relative short amount of time).

Note: we will discuss the blood pressure and nightly sleep implications of continued buying of such a stock during a bear market (down stock prices) at some point down the road.

Some other (smart) people before us have followed this path before, and established a list of so called ‘dividend champions’ or ‘dividend aristocrats’. Take a look at the below two hyperlinks; one of those is to the DRiP Investing homepage, a most awesome source for anything regarding dividend investment (did you know that most of those dividend paying company also offer the general public, i.e. individual investor, to directly invest with the company bypassing the stock broker entirely? Talk about nifty!).

Wikipedia S&P 500 Dividend Aristocrats

DRiP Investing Resource Center-Dividend Champions

Go ahead, take a look at those two links above. Consider it your ‘homework assignment’ out of today’s discussion. Yeah, I forgot, there will be such required independent reading, quite frequently.


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Interesting Read

In may regular quests to keep up with the myriad of information available on the subject, I occasionally run across a good and educational article that opens up a new perspective for me and my approach to investing.
I did run across such an article just today:http://seekingalpha.com/article/1647512-dollar-cost-averaging-viable-for-individual-stock-portfolios?source=email_investing_income&ifp=0



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That elusive strategy

Strategy – what type of investments to buy with my money? A big word, how can I best get my arms around it? In the technical lingo of financial investments, how risk tolerant am I? Can I tolerate to lose all the money in the account and still be able to pay my daily cost of living? Do I have a pressing need for the funds within the next 5 years (as much as that question can be answered today)? Do I rely on the funds to be some level of reserve, a just in case source of funds?

My personal answers to any of those questions: a firm ‘No’. I am aware that this may not be the case for everyone out there. So let me re-iterate: if you are planning for a PERSONAL and INDIVIDUALISTIC start in the exciting world of investing, ONLY do it with money you can truly spare and live without! Proceed at your own risk!

Back to the strategy. My personal idea of strategy would be for the invested capital to grow and appreciate by way of stock price increase as much as possible. If you have spent any time whatsoever so far observing the stock markets, let alone individual stocks and their price movements, that is quite a rollercoaster ride. And it doesn’t always go up, let alone, advertise which direction it is about to take.

While able to stomach quite a bit of risk, I do not think putting all my eggs into a single basket and hoping for the selected stock to rise enough in share price to outpace inflation, capital gains taxes and still provide for some income…. get real, not going to happen. I am not a day trader, nor do I aspire to become one.

Long term, that approach would only add to the number of gray hair and increase in blood pressure, and not do a thing to cause my bank account to become a little more plump.

OK, so what else can we do?

It would sure be nice if the chosen company would pay its shareholders for holding their shares, sharing some of the profit it is able to generate from my invested funds. That concept does exist indeed, and it is called Dividends.

Given the amount of funds I have at my disposal initially, $1000, what kind of indicators should I employ to maximize the potential for dividends?

Dividend yield alone? A yield of 4% sounds good, much better than the current interest rates any bank or money market fund pays these days.

We all know the statistical advantages of referencing something as a percentage. Let’s add a dash of reality to that percentage value. Let’s assume an average price of an illustrative stock: $50. At 4% yield, that would equal a $2 dividend payment, which is paid out on a quarterly basis, usually. So, for our example stock, we would be receiving 50 cents every 3 months for every share owned.

Given our investment amount of $1000, we would own a whopping 20 shares. Do the math: 20 * $.50 = $10 / quarter. $40 / year.

mmmhhhhhh….. let’s think about that for some time.

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