Dividend Strategy Ain't For Everyone

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goodoboy
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Dividend Strategy Ain't For Everyone

Post by goodoboy » Fri Aug 01, 2014 11:26 am

Hello,

I just wanted to share this thoughts (I could be wrong or right, or whatever) to all the simple people out there so they don't feel alone.

I am simple minded person and I try to keep investing as simple as possible so that I build enough moneny in my retirement accounts (401K and Roth IRA) so me (and wife and dogs) can retire at age 61 (now 34) comfortable. I have our esitmated retirement number. 

Here is what I don't get! I hear from co workers, random people and some blogs about building a Dividend Income Strategy by buying stocks with great (and continously) dividend growth to produce good yield and income at retirement age. This sounds cool and some work involved and to each its own.

My point is what difference does it make, isn't everyone goal is the same: to have income by retirement age?

I am not knocking anyone strategy. But I just believe the simple approach is the best approach.

But I feel for the simple people with modest income and really don't want to be researching stocks and all that and finding high dividend stocks should just do the following and be done with it.

1. wife and husband TRY to max each 401K up to $17.5K per year (properly allocated with index funds, no stocks)

2. wife and husband TRY to max each Roth IRA up to $5.5K per year (properly allocated with index funds, no stocks)

3. If your blessed to have more money after step 1 and 2, buy divdend stocks if you like. But the normal folks can barely get pass step 2.

I took those numbers in the above steps and calculated how much wee have in 30 years from now at 7% yearly return, and if me and my wife just TRY to do that above, we more than doubled our estimated retirement number. Sounds easy to me and I never had to research one stock for high dividend yield. These index funds have dividends as well. 

Yet and still I hear soo many people looking for stocks paying high dividend. I often wonder if they attempt step 1 and 2 first. 

I am going to stick to step 1 and 2, unless I am missing something, if so please inform me. 

Any comments or opinions on this topic.

Thanks

livesoft
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Re: Dividend Strategy Ain't For Everyone

Post by livesoft » Fri Aug 01, 2014 11:33 am

I read other blogs that state that the dividend income strategy is flawed and that a lot of people are fooled into thinking it is good. I do not use it and I don't think anyone else should use it either --- even if they get to step 3.
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Re: Dividend Strategy Ain't For Everyone

Post by dickenjb » Fri Aug 01, 2014 11:33 am

You are not missing anything. Return is return, whether it comes from dividends or capital appreciation.

goodoboy
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Re: Dividend Strategy Ain't For Everyone

Post by goodoboy » Fri Aug 01, 2014 11:44 am

livesoft wrote:I read other blogs that state that the dividend income strategy is flawed and that a lot of people are fooled into thinking it is good. I do not use it and I don't think anyone else should use it either --- even if they get to step 3.
Livesoft,

I didn't want to offend anyone in the original post, but I 100% agree. Common folks should do step 1 and 2. But soooooo many articles say otherwise and misleading.

I wrote this cause my 18 years old cousin ask me about investing and someone guided her to a Dividend Strategy blog. I redirected her here. Lol

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Re: Dividend Strategy Ain't For Everyone

Post by YDNAL » Fri Aug 01, 2014 12:03 pm

goodoboy wrote:... I hear soo many people looking for stocks paying high dividend. I often wonder if they attempt step 1 and 2 first.

I am going to stick to step 1 and 2, unless I am missing something, if so please inform me.

Any comments or opinions on this topic.
Fundamentally, retirement savings = deferring CURRENT income for FUTURE consumption.
  • 1. The more we defer ("steps 1, 2, perhaps 3" as you say), the better we will be later.
    2. Diversify the savings, watch costs, and all else is secondary -- including "dividend strategies", "tilting to XYZ", you name it.
Understanding this, we are on our way to win this battle!
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Aptenodytes
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Re: Dividend Strategy Ain't For Everyone

Post by Aptenodytes » Fri Aug 01, 2014 12:12 pm

Magic doesn't work. Listen to your senses. You are doing the right thing.

A world without magic is so much more boring than one with magic. That explains the constant appeal. But we live in the world without magic, so the people who know that come out ahead in life.

goodoboy
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Re: Dividend Strategy Ain't For Everyone

Post by goodoboy » Fri Aug 01, 2014 12:17 pm

dickenjb wrote:You are not missing anything. Return is return, whether it comes from dividends or capital appreciation.
Glad to read my (and anyone else) simple approach is agreed with. Im all for working smarter not harder. Researching stocks is lots of work. I rather get the basic (step 1 and 2) and right first and then enjoy my time off work doing other things productive or fun. The outcome is the same, and step one and two takes about 20 minutes a year just to rebalance accounts to AA. Seems simple to me. Building a Hugh dividend portfolio takes skill, and extra risk of getting it right. Just my opinion.

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Aptenodytes
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Re: Dividend Strategy Ain't For Everyone

Post by Aptenodytes » Fri Aug 01, 2014 12:27 pm

In your case it isn't the simplicity that makes your approach better, it is the accuracy.

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Re: Dividend Strategy Ain't For Everyone

Post by Imperabo » Fri Aug 01, 2014 12:31 pm

dickenjb wrote:You are not missing anything. Return is return, whether it comes from dividends or capital appreciation.
And if the total return is equal, then I'd rather have capital appreciation because I have more control over my tax situation.

Also, certain types of companies are more likely to have high dividends, so I would worry about lack of diversification by using a heavy screen for dividends.

goodoboy
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Re: Dividend Strategy Ain't For Everyone

Post by goodoboy » Fri Aug 01, 2014 1:05 pm

YDNAL wrote:
goodoboy wrote:... I hear soo many people looking for stocks paying high dividend. I often wonder if they attempt step 1 and 2 first.

I am going to stick to step 1 and 2, unless I am missing something, if so please inform me.

Any comments or opinions on this topic.
Fundamentally, retirement savings = deferring CURRENT income for FUTURE consumption.
  • 1. The more we defer ("steps 1, 2, perhaps 3" as you say), the better we will be later.
    2. Diversify the savings, watch costs, and all else is secondary -- including "dividend strategies", "tilting to XYZ", you name it.
Understanding this, we are on our way to win this battle!
I agree YDNAL. But many don't know this. Heck I didn't at one time.

goodoboy
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Re: Dividend Strategy Ain't For Everyone

Post by goodoboy » Fri Aug 01, 2014 1:33 pm

Aptenodytes wrote:Magic doesn't work. Listen to your senses. You are doing the right thing.

A world without magic is so much more boring than one with magic. That explains the constant appeal. But we live in the world without magic, so the people who know that come out ahead in life.
You are right, good analogy. Now, we don't make enough to do step 1 and 2, but that's our goal one day.

I really didn't expect much agreement to my post. But I felt this way for long time. And if you think about, dividend strategy want make you instant rich, it's just income. No difference from what boring step 1 and 2 will get the normal everyday person. I'm all for less headache.

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Re: Dividend Strategy Ain't For Everyone

Post by Phineas J. Whoopee » Fri Aug 01, 2014 1:43 pm

Total return is total return, or in the words of some unknown sage, fish is fish.
PJW

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Re: Dividend Strategy Ain't For Everyone

Post by Ged » Fri Aug 01, 2014 1:49 pm

I used to practice this strategy. I think it is better than some, but....

There are a number of serious issues with this strategy. One of them is concentration. There are not that many companies that have a strong long term history of dividend growth, so you end up being concentrated in a fairly small number of stocks.

With that any one of these going bad can be a serious event. Such a thing happened to me when BP blew out in the Gulf. Their stock plummeted and they stopped paying dividends.

If you spend a lot of time watching these individual issues maybe you can avoid a lot of the risk associated with concentration. Or maybe not. What you cannot avoid is having to spend a lot of time watching your stocks.

This is not how most people want to spend their retirement. Later in life when cognitive decline starts it become very impractical.

Passive investing, depending on total return and total market ownership is just a much better way.

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Re: Dividend Strategy Ain't For Everyone

Post by goodoboy » Fri Aug 01, 2014 2:03 pm

Why do so many people do and believe in dividend income strategy?

One guy I talked to says he cares about the yield his dividends are producing him when retired he don't care about his portfolio return. I say doing, step 1 and 2, then once I reach my goal, I no longer need to invest a dime.

Is it not the goal to reachieve whatever retirement goal and be done? What's with all the dividend blogs saying build 50 dividend stock portfolio? Maybe different goals

I'm not trying to pick on dividend investors, but for those who will work at company for a living, why waste time looking up stocks for our retirement accounts, just keep the AA updated, and keep on investing.
Last edited by goodoboy on Fri Aug 01, 2014 2:08 pm, edited 1 time in total.

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galeno
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Re: Dividend Strategy Ain't For Everyone

Post by galeno » Fri Aug 01, 2014 2:03 pm

As a non-USA investor in the global financial markets via the USA for 30 years because of cost and safety, I feel USA persons commit two investment mistakes: 1. Own-country bias. 2. Yield chasing.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.13%. Term = 34 yr. FI Duration = 6.2 yr. Portfolio survival probability = 95%.

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Re: Dividend Strategy Ain't For Everyone

Post by maj » Fri Aug 01, 2014 2:26 pm

There is another aspect to dividend investing which has not been mentioned, as far as I can see.
My 'chase' after dividends is based on dividends from highest quality stocks with wide moats and history of earning and dividends growth. Sort of a Buffet approach for a small investor.
I do this dividend investing passively, with two index funds/etfs which are low cost and which combined provide broad diversification.

What is not discussed regarding Total Market stock funds is that one thereby owns a couple of thousand companies which are barely surviving, pay little or no dividends and most of which will disappear within 10-15 years of going public.
Luckily, with a cap weighted Total Market fund these poor businesses take up only a minor percent of assets. In fact, I also own Total Market Funds.

Finally, I have huge tolerance for large market drops and simply add to holding as I did in 2000 and 2009 and 2011.

Peace

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Re: Dividend Strategy Ain't For Everyone

Post by GerryL » Fri Aug 01, 2014 2:51 pm

I recall a long-ago conversation with my dad shortly after he retired -- and before I ever thought of income in retirement. He said a financial advisor had put his savings into utilities because utility dividends have ALWAYS provided a sure income in retirement. Apparently, not too long after that the "sure income" became a myth.

His income also included dividends from the company stock he had gotten during his years of employment at a big auto maker. Shortly after he died in 2006 those stock were paying $0 dividends for quite a few years.

He enjoyed a modest but comfortable retirement, but those two incidents have made me wary of depending on dividends for income.

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Re: Dividend Strategy Ain't For Everyone

Post by magician » Fri Aug 01, 2014 3:45 pm

Aptenodytes wrote:Magic doesn't work.
Does too!
Simplify the complicated side; don't complify the simplicated side.

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Phineas J. Whoopee
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Re: Dividend Strategy Ain't For Everyone

Post by Phineas J. Whoopee » Fri Aug 01, 2014 5:46 pm

maj wrote:...
Finally, I have huge tolerance for large market drops and simply add to holding as I did in 2000 and 2009 and 2011.
...
That's interesting, and I say so as a person who thinks the dividend-seeking strategy is flawed. I wonder to what extent dividend investors have done better than many others simply because they don't care about market prices as long as the dollar value of the payouts continues. Panicking and selling low wouldn't be an issue.

If that means people trade less often than average, it might account, again from my admittedly non-dividend (I didn't say anti-dividend) viewpoint, for the good reputation the style has acquired.

Thanks for providing the impetus for the thought, whether or not we ever can agree on it. :happy

PJW

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Re: Dividend Strategy Ain't For Everyone

Post by retiredjg » Fri Aug 01, 2014 6:07 pm

goodoboy wrote:Why do so many people do and believe in dividend income strategy?
I think a lot of people think dividends are some kind of free money. They don't realize it is just part of the total return that your investment makes.

What they do not realize is that the taxes on their dividends may be higher than the taxes on capital gains (another part of the total return that your investment makes). Capital gains are taxed at 15% for most people. Qualified dividends are also taxed at 15%, but unqualified dividends are taxed at their regular tax rate which is higher than the capital gains rate. Somebody with more knowledge could chime in with what makes a dividend qualified vs what doesn't cause I don't know much about it.
One guy I talked to says he cares about the yield his dividends are producing him when retired he don't care about his portfolio return.
This will work if his dividend stream is dependable. And people assume it always will be. But it's just like a waterfall. When theres no rain for a long time, most waterfalls start to dry up. There is no guarantee that his dividends won't do the same.

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Re: Dividend Strategy Ain't For Everyone

Post by goodoboy » Fri Aug 01, 2014 6:39 pm

Here is what is funny to me.

People talking about buying dividends stocks and working everyday just like me! Maybe I am slow or too simple thinking. I rather do step 1 and 2 ANYDAY of the week, then sit in front of a computer watching a 30-70 dividends stocks daily and keeping up with who is paying what and if its growing and what not.

I just don't get it. Seems like a whole lot of work.

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Re: Dividend Strategy Ain't For Everyone

Post by cheesepep » Fri Aug 01, 2014 7:01 pm

I'll try to allay some concerns as a dividend investor.

There are many different kinds of dividend strategies, some of which I strongly disagree with.

However, one idea, which I profess to, is to own a basketful of stocks (around 15-20) and hold for the long-term. That means that your dividends, if taxed, are taxed at 15%.

Anything more than 15-20 leads to diworsification. That is to say you need to diversify some but do not need to be diversified (as in 30 plus stocks). Even if a few stocks go down or stop paying dividends, you will be saved. Pundits may bring up the issue of BP as its dividend, but that is just cherry picking. There is a list of companies paying increasing dividends for 25 plus years which is sound However , if one or two of the stocks stops or cuts its dividend, as pundits, will bring up, your other stocks will pull their weight and your ultimate portfolio won't be affected much.

And then there is the issue of total return vs dividends being part of your return -- yes, dividends to take se off the top of your stock, but due to the everyday noise of the market, it is trivial (say 3% dividend a year , dividends four times a year means 0.75% change every time a stock pays its dividend).

Also, the goal of dividend investors, such as myself, is to NOT touch the portfolio after retirement. There is no 4% rule of withdrawing because their is no withdrawal of the principal. However, this requires the inventor to have a fairly large portfolio size which makes it not for everyone.

There is no need to watch your stocks every day and see what dividend is growing as someone noted above. If you own some of the companies in the list noted above, you should be able to sleep well at night. I know I do. There is also no need to track your portfolio every day and make changes. For myself, I check every day because it is a hobby of mine, but I do not sell. I only buy every two weeks or so if the market permits (sometimes several trades a day, but only to buy).

It does work for me and I love working on mine.

Edit: apologizes for the numerous mistakes. I am typing on an iPhone. I would also like to add that dividend investors do not try to simulate the market using their stocks. Just a different path to the same goal.
Last edited by cheesepep on Fri Aug 01, 2014 8:01 pm, edited 2 times in total.

goodoboy
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Re: Dividend Strategy Ain't For Everyone

Post by goodoboy » Fri Aug 01, 2014 7:04 pm

cheesepep wrote:I'll try to allay some concerns as a dividend investor.

There are many different kinds of dividend strategies, some of which I strongly disagree with.

However, one idea, which I profess to, is to own a basketful of stocks (around 15-20) and hold for the long-term. That means that your dividends, if taxed, are taxed at 15%.

Anything more than 15-20 leads to diworsification. That is to say you need to diversify some but do not need to be diversified (as in 30 plus stocks). Even if a few stocks go down or stop paying dividends, you will be saved. Pundits may bring up the issue of BP as its dividend, but that is just cherry picking. There is a list of companies paying increasing dividends for 25 plus years which is sound However , if one or two of the stocks stops or cuts its dividend, as pundits, will bring up, your other stocks will pull their weight and your ultimate portfolio won't be affected much.

And then there is the issue of total return vs dividends being part of your return -- yes, dividends to take se off the top of your stock, but due to the everyday noise of the market, it is trivial (say 3% dividend a year , dividends four times a year means 0.75% change every time a stock pays its dividend).

Also, the goal of dividend investors, such as myself, is to NOT touch the portfolio after retirement. There is no 4% rule mpf withdrawing because their is no withdrawal of the principal. However, this requires the inventor to have a fairly large portfolio size which makes it not for everyone.

It does work for me and I love working on mine.
Thanks for comment

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Re: Dividend Strategy Ain't For Everyone

Post by MossySF » Fri Aug 01, 2014 7:20 pm

Dividend strategy works ... you just have to save a ton more if you want a broadly diversified portfolio versus investing a riskier pool of individual high yield stocks.

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Re: Dividend Strategy Ain't For Everyone

Post by hoppy08520 » Fri Aug 01, 2014 7:43 pm

I think dividend investors are a holdover from the pre-index fund age and really even prior to mutual funds. Prior to mutual funds, a good investor bought a basket of stocks to assemble a DIY index fund, or your own personal Dow Jones index. Back then, buying and selling stocks was more complicated and far more expensive because you had to go through a stockbroker. People liked dividend income because there were no charges and complexity and you just got the money.

Although trades are now far cheaper and easier, the old-style dividend investing practice lives on, even though the original justification for it does not.

The other reason it lives on is the somewhat-questionable belief that companies that pay dividends are more stable. That could be true (although if you read some of the threads from Larry Swedroe, that assertion might be a myth), but then maybe that means you leave out growth companies like Apple that rarely pay dividends. If someone can make the case that dividend-paying stocks are somehow better than low/no-dividend paying stocks, I haven't seen it.

Another reason is that some people have an emotional aversion to selling shares. Again, this is not logical, because dividend-paying companies simply exchange a higher-growing NAV for dividends vs a non-dividend company that will raise the NAV. But people put on blinders. You don't have to do anything to get dividends, but you do have to do something if you need to sell shares for income. Even if the net of both strategies is the same, some people just don't want to sell shares because they think they're "losing" something. It's a fallacy.

Finally, I think dividend investing is popular due to plain ignorance. The very word "dividend" has a good connotation. The word is used in non-investing conversation as in, "If we implement this plan, it will pay dividends." So people like dividends, even if they don't know why. There's something about seeing money get deposited to your account, even if that money comes right out of the NAV, that people like at an emotional level, even if it's not logical. It's almost similar to using a grocery store coupon for an expensive name brand when you can get an identical generic brand for less than the discounted main brand. People still get a thrill out of using a coupon. I don't understand it. I use my mom as an example of "Jane Investor" (no offense to Mom). When my mom was with an advisor, she said she liked that he had her in funds that pay dividends. When I asked why, she couldn't really even answer other than, "Don't you want dividends? I thought you want dividends for income." That's just the buzz she heard all her life.

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Re: Dividend Strategy Ain't For Everyone

Post by pkcrafter » Fri Aug 01, 2014 7:52 pm

Question to accumulation investors using a dividend approach. What do you do with the dividends?

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Dividend Strategy Ain't For Everyone

Post by Phineas J. Whoopee » Fri Aug 01, 2014 8:01 pm

pkcrafter wrote:Question to accumulation investors using a dividend approach. What do you do with the dividends?

Paul
Sorry, I misread the question so my response wasn't relevant.
PJW
Last edited by Phineas J. Whoopee on Fri Aug 01, 2014 8:03 pm, edited 1 time in total.

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Re: Dividend Strategy Ain't For Everyone

Post by MIretired » Fri Aug 01, 2014 8:02 pm

Dividend investing has many correlations to value investing. But not deep value.
Last edited by MIretired on Fri Aug 01, 2014 9:37 pm, edited 2 times in total.

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Re: Dividend Strategy Ain't For Everyone

Post by SpaceCommander » Fri Aug 01, 2014 8:36 pm

As noted many times before, this forum is hardly the place for a rational discussion of income stock investing. It quickly degenerates into name calling and put downs; frankly, it's tiresome. To proudly assert that income stock investors are irrational, illogical, ignorant, with "blinders on", naive, unread, that their strategies have no merit, etc., hardly facilitates reasonable discourse. I think Bogleheads are better than that.

If it's not for you, then fine. But please don't disparage the many who employ these strategies with great results. Especially when the lauded alternative is to systematically overweight the most expensive stocks, and underweight the cheapest (aka: market cap weighted indexing!) I could say a lot more, but discretion is the better part of valor. I think I'll just bite my tongue. I might recommend certain others do the same.
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Re: Dividend Strategy Ain't For Everyone

Post by EyeYield » Fri Aug 01, 2014 9:01 pm

A dividend income strategy should be for everyone. Why invest if you're not going to get something in return?
Dividend strategy needs to be defined, other than looking for individual stocks. The S&P 500 index consists of individual stocks that mostly pay dividends.
The three fund portfolio is an excellent dividend income strategy.
The three fund portfolio currently yields approx 2.5%, depending on allocation, which is enough for many to live on after investing, and reinvesting the divs and distributions, for 40 years in a Roth or other tax efficient portfolio. (Ex. 2mil @ 2.5% = 50k)
There's nothing wrong with that.
"The stock market is a giant distraction from the business of investing." - Jack Bogle

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Re: Dividend Strategy Ain't For Everyone

Post by MIretired » Fri Aug 01, 2014 9:14 pm

SpaceCommander wrote:As noted many times before, this forum is hardly the place for a rational discussion of income stock investing. It quickly degenerates into name calling and put downs; frankly, it's tiresome. To proudly assert that income stock investors are irrational, illogical, ignorant, with "blinders on", naive, unread, that their strategies have no merit, etc., hardly facilitates reasonable discourse. I think Bogleheads are better than that.

If it's not for you, then fine. But please don't disparage the many who employ these strategies with great results. Especially when the lauded alternative is to systematically overweight the most expensive stocks, and underweight the cheapest (aka: market cap weighted indexing!) I could say a lot more, but discretion is the better part of valor. I think I'll just bite my tongue. I might recommend certain others do the same.
Point taken. I thought I was being unethical, and you are correct. Got to stay on my toes, here. My apologies. Didn't really mean it to be a joke. Thought I was constructive. I suppose I did it in an abrasive way.

edit" I'll actually remove my post on the grounds of it not being additive.
I'll change it.

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Re: Dividend Strategy Ain't For Everyone

Post by rj49 » Fri Aug 01, 2014 10:58 pm

The dividend strategy is being used by advisors and finance professionals to assuage the fears of those trying to find an alternative to miserable bond yields. They promote dividend stocks as an equivalent to bonds, neglecting to mention to what happened to dividend funds that were loaded with high-yielding bank stocks in 2007. Consequently, high dividend stocks have been been bought up, inflating their costs, advisors make more money, and investors will get burned when the value of all the dividends are washed away in the next market downturn. A 5-year bull market in stocks and miserable fixed income yields will persuade people to look for the magic bullet for safe, dependable yield. But you won't find many advisors (other than Allan Roth) advising people to play it safe with CDs with 3% or higher yields and a put option.

Actually, in his first book on mutual funds, Mr. Bogle suggested such an approach for retirees, with stocks divided into a value fund and an equity-income fund, but at the time such stocks were yielding over 5% (as were bonds), so living off dividends made more sense.

My belief is that the frightened herd flocked to bonds in 2007-2008, which was the best time to buy stocks on sale, so now that everyone is reaching for yield through high-yield bonds, REITs, and high-dividend stocks (and ignoring risk), it would seem sensible to invest in things that people don't seem so exuberant about. Fixed income is for safety, stocks are for growth, and if you take that approach you can avoid fixating on yield (the unfavorable taxation of most yield products also helps not obsessing over it).

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Re: Dividend Strategy Ain't For Everyone

Post by pop77 » Sat Aug 02, 2014 8:08 am

SpaceCommander wrote:As noted many times before, this forum is hardly the place for a rational discussion of income stock investing. It quickly degenerates into name calling and put downs; frankly, it's tiresome. To proudly assert that income stock investors are irrational, illogical, ignorant, with "blinders on", naive, unread, that their strategies have no merit, etc., hardly facilitates reasonable discourse. I think Bogleheads are better than that.

If it's not for you, then fine. But please don't disparage the many who employ these strategies with great results. Especially when the lauded alternative is to systematically overweight the most expensive stocks, and underweight the cheapest (aka: market cap weighted indexing!) I could say a lot more, but discretion is the better part of valor. I think I'll just bite my tongue. I might recommend certain others do the same.
+1 . It is so easy to feed off on each other's disdain for an approach. I do have a portion of my assets in Dividend Paying and Growing stocks. I am currently in accumulation phase and do not need dividends for income. I simply reinvest them back into stocks. I do not immediately reinvest upon dividend payment as this is a cost basis nightmare, I collect them and invest them once or twice a year. This also allows me to find the cheapest stock and invest in them.

I have the following criteria for stock selection - (The most important ones)
  • Company has a well diversified set products and is also geographically diversified in terms of revenue
    ROIC at least 15% for the past 10 years
    Payout ratio less than 60%
    P/FCF less than 18 (when purchased)
    Dividend yield of 2.0% or higher
    Annualized Dividend growth rate for the past 10 years 10% or higher
    10 years of positive Free Cash Flow
I am very passive and do not sell a stock unless something drastic happens. I do not trade or do not chase dividends. Based on past history and conservative projections my DRIP portfolio will generate enough in dividends to cover my expenses 15 years from now. As the average dividend growth rate of my portfolio is in high single digits/low teens, I am all set from an inflation perspective. I know theorists will argue about single company risks but these companies are like individual countries. They generate enough revenue and profits that surpasses many countries GDP. Can companies like JNJ, PEP, KO, WMT, NSRGY, UTX, all go under or cut dividends at the same time? theoretically yes, so can the entire S&P 500 or total stock market.

Last two days is a perfect example of how a dividend investor need not worry about market corrections, If it is July 31 and market corrects 2%, the dividend investor need not even blink an eye as none of the stocks in my portfolio cut the dividends, I get paid like clockwork. For example I got WMT in 2007 at 43 dollars, here is my yield on WMT from 2008
2008-2.1%
2009-2.5%
2010-2.8%
2011-3.4%
2012- 3.8%
2013- 4.4%
2014- 4.7%
I expect the yield to just grow every year. This is an excellent inflation hedge.

I am not sure many appreciate the power of dividend growth strategy and in a way it is good for those who understand it.

pop77
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Re: Dividend Strategy Ain't For Everyone

Post by pop77 » Sat Aug 02, 2014 8:20 am

goodoboy wrote:Here is what is funny to me.

People talking about buying dividends stocks and working everyday just like me! Maybe I am slow or too simple thinking. I rather do step 1 and 2 ANYDAY of the week, then sit in front of a computer watching a 30-70 dividends stocks daily and keeping up with who is paying what and if its growing and what not.

I just don't get it. Seems like a whole lot of work.
This is a common misconception, when you start young all you need is to buy one or two stocks a year. Over a period of 10 years you can have a portfolio of 20 stocks. Do you have time to analyze one or two companies in an entire year? I think so. It also depends whether you are 'interested' in doing something like that, for those who enjoy analyzing business models and reading annual reports it is a good fit otherwise it is not.

Let us think about the time index investors spend on this forum. They spend their time on analyzing various indexes, tilts, fat tails, correlations, reading academic research papers etc. It all depends on what you are interested in doing.

Aish
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Re: Dividend Strategy Ain't For Everyone

Post by Aish » Sat Aug 02, 2014 8:38 am

SpaceCommander wrote: If it's not for you, then fine. But please don't disparage the many who employ these strategies with great results. Especially when the lauded alternative is to systematically overweight the most expensive stocks, and underweight the cheapest (aka: market cap weighted indexing!) I could say a lot more, but discretion is the better part of valor. I think I'll just bite my tongue. I might recommend certain others do the same.
Why do you think market cap weighting should not be the norm? Are you suggesting equal weight indexing is the norm and we should compare other stock mixes to equal weight indexing as a benchmark?

maj
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Re: Dividend Strategy Ain't For Everyone

Post by maj » Sat Aug 02, 2014 8:57 am

To PJW
Yes, you are on point. If the dividend flow is consistent and gradually increasing, the value of the principal is (theoretically) unimportant if the principle is not needed.
Just as the fluctuating value of one's home is unimportant if it continues the provide security and shelter.

I do not say dividend investing is for everyone, not at all. It is simply what suits me and a few close friends who invest that way.

Note in my original post, I invest for dividends by using cheap index funds with significant screens (factors) for high and sustained quality, wide moats, capped sector and stock allocation (i.e., diversification), etc. My research for the type of fund(s) I want took time but after that, the fund's screens do the work for me.

Morningstar has been mightily helpful as well as US NEWS rankings and ETF.com evaluations of ETFs. The funds that draw my attention are VIG, VYM, and SCHD. I have been unable to find an international dividend paying index fund to my liking--either too expensive or not cap-weighted. So if the present sell off continues, I am likely going to use SCHF as a decent, quality proxy.
Vanguard offers a Global High Dividend Yield Index ETF but only in Europe, and to my knowledge Vanguard does not offer an international version of VIG anywhere.

Also, I hold Vanguard LifeStrategy Growth Fund (Indexed) just to make sure I get a taste of future Googles and Apples!

Best wishes.

P.S. Thanks for taking the time to read carefully my original post.

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nedsaid
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Re: Dividend Strategy Ain't For Everyone

Post by nedsaid » Sat Aug 02, 2014 9:00 am

I don't think you are missing anything. If you can max your 401k's and ROTH IRA's every year (which I have never come close to doing), you will be fine. There are a lot of threads on this, many of them started by Larry Swedroe. Pretty much what he says is that higher dividend stocks have done a bit better as the market as a whole but this is due to the Value characteristics of these stocks, the dividends themselves do not cause the performance premium. In the case of stocks that consistently raise their dividends, any outperformance is probably due to what he calls the quality premium. So if you get outperformance from these stocks it is either from their value characteristics (higher dividend strategy) or their quality characteristics (dividend growth). Larry has cautioned that the higher dividend stocks often trade for higher P/E's than the market itself, so these stocks are not in the bargain bin since people are chasing yield.

I do like a dividend strategy. I like seeing the cash payments hit my Brokerage IRA account. There actually were companies whose dividend yield from their stock was more than the interest yield on their bonds!! But remember that stocks are stocks and not bonds and in most circumstances will be more volatile. If you can ride the ups and downs of the market and collect the dividends, this is not a bad way to go. Many companies increase their dividend payouts over time and gives your income a measure of inflation protection that bonds except for TIPS cannot. The problem is that everyone and their brother are chasing yield right now, this is not a good time to start up with this strategy. The higher dividend stocks are vulnerable to interest rate hikes just like bonds.
A fool and his money are good for business.

Dandy
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Re: Dividend Strategy Ain't For Everyone

Post by Dandy » Sat Aug 02, 2014 9:04 am

Focusing on broad based index funds and savings rate is on not off the mark. That approach doesn't make much money for financial firms, their advisors or the media. But, it seems to make for a good retirement for those who follow that approach.

retiredjg
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Re: Dividend Strategy Ain't For Everyone

Post by retiredjg » Sat Aug 02, 2014 9:29 am

pop77 wrote:+1 . It is so easy to feed off on each other's disdain for an approach. I do have a portion of my assets in Dividend Paying and Growing stocks. I am currently in accumulation phase and do not need dividends for income. I simply reinvest them back into stocks. I do not immediately reinvest upon dividend payment as this is a cost basis nightmare, I collect them and invest them once or twice a year. This also allows me to find the cheapest stock and invest in them.

I have the following criteria for stock selection - (The most important ones)
  • Company has a well diversified set products and is also geographically diversified in terms of revenue
    ROIC at least 15% for the past 10 years
    Payout ratio less than 60%
    P/FCF less than 18 (when purchased)
    Dividend yield of 2.0% or higher
    Annualized Dividend growth rate for the past 10 years 10% or higher
    10 years of positive Free Cash Flow
I am very passive and do not sell a stock unless something drastic happens. I do not trade or do not chase dividends. Based on past history and conservative projections my DRIP portfolio will generate enough in dividends to cover my expenses 15 years from now. As the average dividend growth rate of my portfolio is in high single digits/low teens, I am all set from an inflation perspective. I know theorists will argue about single company risks but these companies are like individual countries. They generate enough revenue and profits that surpasses many countries GDP. Can companies like JNJ, PEP, KO, WMT, NSRGY, UTX, all go under or cut dividends at the same time? theoretically yes, so can the entire S&P 500 or total stock market.

Last two days is a perfect example of how a dividend investor need not worry about market corrections, If it is July 31 and market corrects 2%, the dividend investor need not even blink an eye as none of the stocks in my portfolio cut the dividends, I get paid like clockwork. For example I got WMT in 2007 at 43 dollars, here is my yield on WMT from 2008
2008-2.1%
2009-2.5%
2010-2.8%
2011-3.4%
2012- 3.8%
2013- 4.4%
2014- 4.7%
I expect the yield to just grow every year. This is an excellent inflation hedge.

I am not sure many appreciate the power of dividend growth strategy and in a way it is good for those who understand it.
I think this is a good example of both sides of the argument. Apparently this approach works for you and I trust that it will continue to do so.

But your post also illustrates exactly why this approach would be a poor one for the vast majority of investors - you have to have a higher level of knowledge to begin with and you have to work at it on a regular basis. Granted, you don't see it as work - you enjoy it. And you didn't mind learning all that stuff on the front end because you found it interesting and probably found it easy.

I don't think this is a skill that the average person on the street can master or would be interested in mastering. While I don't disparage what you are doing, it is certainly not for the average person, in my opinion. And for that reason, I'm glad we can fall back on the relatively simple approach of "own everything and keep it".

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Aptenodytes
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Re: Dividend Strategy Ain't For Everyone

Post by Aptenodytes » Sat Aug 02, 2014 11:55 am

retiredjg wrote:
pop77 wrote:
... [detailed summary of dividend-oriented stock investing] ...
I think this is a good example of both sides of the argument. Apparently this approach works for you and I trust that it will continue to do so.

But your post also illustrates exactly why this approach would be a poor one for the vast majority of investors - you have to have a higher level of knowledge to begin with and you have to work at it on a regular basis. Granted, you don't see it as work - you enjoy it. And you didn't mind learning all that stuff on the front end because you found it interesting and probably found it easy.

I don't think this is a skill that the average person on the street can master or would be interested in mastering. While I don't disparage what you are doing, it is certainly not for the average person, in my opinion. And for that reason, I'm glad we can fall back on the relatively simple approach of "own everything and keep it".
It seems that even if one accepts the theoretical proposition that a dividend-oriented approach along these lines can work, I fail to see the basis for thinking that any individual, even a talented one, could do better than an actively managed fund with the same investing philosophy. If I believed the premise that guides pop77's portfolio choices, I would be in an active fund with a team of full-time people doing the work for me.

dognose
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Re: Dividend Strategy Ain't For Everyone

Post by dognose » Sat Aug 02, 2014 12:11 pm

I'm a total return investor, but I know a lot of dividend investors. These folks tend to invest in master limited partnerships, REITs, "high dividend" stocks, selected preferred stocks and even international value stocks. This can be a highly sophisticated, high-yield form of investing with reasonable long-term growth. It's not my cup of tea, but these folks aren't stupid, and it's a mistake to dismiss them simply because they're not embracing the traditional Bogleheads three-fund portfolio.

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Re: Dividend Strategy Ain't For Everyone

Post by pkcrafter » Sat Aug 02, 2014 1:15 pm

I also did not mean to be sarcastic--I genuinely want to know what accumulators do with their dividends? If they simply reinvest them then there is no advantage that I can see. As we all know dividends are part of total return. If fund (or stock) A has a total return of 8% and stock B be has a divided of 2% and appreciation of 6%, there is no difference. If you take the dividends, then your choices are keep them in cash or invest them in something else. But if you are doing what pop77 is doing--taking them and holding them for awhile then reinvesting--it's costing you.

So, what are you doing with dividends?

Dividends where initially an incentive to get investors to invest in stocks. Back then dividends were much higher than today. Dividends were the required risk premium.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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baw703916
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Re: Dividend Strategy Ain't For Everyone

Post by baw703916 » Sat Aug 02, 2014 2:21 pm

A dividend strategy seems to mean many different things.

I'll first point out that it doesn't have to involve investing in individual stocks. There are quite a few dividend-oriented index funds/ETFs out there, including one from Vanguard.

I do own a couple dividend oriented ETFs. Not so much because I'm interested in dividends per se, but because they tend to correlate with value: growth companies tend not to pay much (or anything) in the way of dividend, because they are reinvesting profits in growing the company. There aren't much in the way of international small cap or emerging market value index funds out there, so dividend funds are the closest thing I can currently buy.

If you aren't interested in having a value tilt, then there's probably no reason for pursuing dividends.

What do you do with the dividends if you don't need to spend them? Reinvest! Total return is all that matters.
Most of my posts assume no behavioral errors.

pop77
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Re: Dividend Strategy Ain't For Everyone

Post by pop77 » Sat Aug 02, 2014 3:00 pm

retiredjg wrote:
I don't think this is a skill that the average person on the street can master or would be interested in mastering. While I don't disparage what you are doing, it is certainly not for the average person, in my opinion. And for that reason, I'm glad we can fall back on the relatively simple approach of "own everything and keep it".
Aptenodytes wrote:It seems that even if one accepts the theoretical proposition that a dividend-oriented approach along these lines can work, I fail to see the basis for thinking that any individual, even a talented one, could do better than an actively managed fund with the same investing philosophy. If I believed the premise that guides pop77's portfolio choices, I would be in an active fund with a team of full-time people doing the work for me.
I agree with you 100% . However the toughest skill of all to master is patience and aspects of behavioral finance. As you have mentioned the stocks that would fit in a dividend growth portfolio typically are well covered by analysts who are smart and get paid top dollars for covering these stocks. They travel well, attend company's analyst meetings and potentially have more information. Still why there are opportunities in these large cap stocks? It is because, it is easy to go with the crowd and these analysts do not have a long term view. They look at quarterly results and short term issues and value the company using recency bias.

Let us just take Apple (AAPL) for example, just an year ago it was trading around 60 dollars. It is a company that is well researched, analyzed and even if a supplier of a supplier to apple does something there are 100 reporters running around reporting on it. In just a year Apple trades close to 100 dollars, a 50% premium why? IMHO there are three edges you need information edge, analytical edge and behavioral edge. I do not have the first two but am working on developing the third one. :-).

Lots of behavioral aspects of DRIP investing are common to boglehead philosophy. When an asset class is down and if you own just an index fund it is easy to rebalance, which is selling that has run up in prices and buy that has gone down in price. You think the current trend will not continue and take a long term view. This is hard to do on stocks.

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tomander
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Re: Dividend Strategy Ain't For Everyone

Post by tomander » Sat Aug 02, 2014 3:13 pm

The Vanguard Equity Income fund, managed by Wellington Co., would be a way for someone to follow the "dividend strategy" and not have to pick individual companies. This fund with dividends reinvested seems to be achieving as well as the 500 index fund.

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baw703916
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Re: Dividend Strategy Ain't For Everyone

Post by baw703916 » Sat Aug 02, 2014 3:16 pm

tomander wrote:The Vanguard Equity Income fund, managed by Wellington Co., would be a way for someone to follow the "dividend strategy" and not have to pick individual companies. This fund with dividends reinvested seems to be achieving as well as the 500 index fund.
Also, the High Dividend Yield Index Fund (VHDYX)
Most of my posts assume no behavioral errors.

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nedsaid
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Re: Dividend Strategy Ain't For Everyone

Post by nedsaid » Sat Aug 02, 2014 4:17 pm

I have posted before about a friend and his wife who has a 100% stock portfolio and he has invested this way for many years. He has used a value and dividend strategy and it has worked well enough for him. The dividends off the portfolio plus whatever Social Security they will get will be enough to retire on. I do not advocate this strategy, particularly as he invested a lot in the higher dividend stocks, but I can't argue with his results. This same friend admitted that it is difficult to beat the broad indexes. I think he enjoys the mental challenge of stock picking and managing a portfolio.

This is the way I used to invest with all my money, but I have de-emphasized individual stocks for years and their proportion of my retirement portfolio has shrunk over the years. There is just something about seeing those dividends hit your account. So I have diversified away from value and dividend investing in individual stocks but I am keeping what I had. Someday that income will sure come in handy.
A fool and his money are good for business.

postingname
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Re: Dividend Strategy Ain't For Everyone

Post by postingname » Sat Aug 02, 2014 4:18 pm

Dividend strategies have two high points from my POV:

- The security of a reasonably constent payout that is a confidence builder
- The flexibility to shift to capital gains instead when market conditions allow (as when the market or an individual stock gets giddy).

goodoboy
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Re: Dividend Strategy Ain't For Everyone

Post by goodoboy » Sat Aug 02, 2014 5:26 pm

pop77 wrote:
SpaceCommander wrote:As noted many times before, this forum is hardly the place for a rational discussion of income stock investing. It quickly degenerates into name calling and put downs; frankly, it's tiresome. To proudly assert that income stock investors are irrational, illogical, ignorant, with "blinders on", naive, unread, that their strategies have no merit, etc., hardly facilitates reasonable discourse. I think Bogleheads are better than that.

If it's not for you, then fine. But please don't disparage the many who employ these strategies with great results. Especially when the lauded alternative is to systematically overweight the most expensive stocks, and underweight the cheapest (aka: market cap weighted indexing!) I could say a lot more, but discretion is the better part of valor. I think I'll just bite my tongue. I might recommend certain others do the same.
+1 . It is so easy to feed off on each other's disdain for an approach. I do have a portion of my assets in Dividend Paying and Growing stocks. I am currently in accumulation phase and do not need dividends for income. I simply reinvest them back into stocks. I do not immediately reinvest upon dividend payment as this is a cost basis nightmare, I collect them and invest them once or twice a year. This also allows me to find the cheapest stock and invest in them.

I have the following criteria for stock selection - (The most important ones)
  • Company has a well diversified set products and is also geographically diversified in terms of revenue
    ROIC at least 15% for the past 10 years
    Payout ratio less than 60%
    P/FCF less than 18 (when purchased)
    Dividend yield of 2.0% or higher
    Annualized Dividend growth rate for the past 10 years 10% or higher
    10 years of positive Free Cash Flow
I am very passive and do not sell a stock unless something drastic happens. I do not trade or do not chase dividends. Based on past history and conservative projections my DRIP portfolio will generate enough in dividends to cover my expenses 15 years from now. As the average dividend growth rate of my portfolio is in high single digits/low teens, I am all set from an inflation perspective. I know theorists will argue about single company risks but these companies are like individual countries. They generate enough revenue and profits that surpasses many countries GDP. Can companies like JNJ, PEP, KO, WMT, NSRGY, UTX, all go under or cut dividends at the same time? theoretically yes, so can the entire S&P 500 or total stock market.

Last two days is a perfect example of how a dividend investor need not worry about market corrections, If it is July 31 and market corrects 2%, the dividend investor need not even blink an eye as none of the stocks in my portfolio cut the dividends, I get paid like clockwork. For example I got WMT in 2007 at 43 dollars, here is my yield on WMT from 2008
2008-2.1%
2009-2.5%
2010-2.8%
2011-3.4%
2012- 3.8%
2013- 4.4%
2014- 4.7%
I expect the yield to just grow every year. This is an excellent inflation hedge.

I am not sure many appreciate the power of dividend growth strategy and in a way it is good for those who understand it.

THank you so much pop77 for responding. I wanted to hear from dividend investors as well. I conclude that its a matter of preference on how someone invest. Rather it be dividend investor the step 1 and 2 investor, we all want the same goal. You seem to be doing well with your plan.

goodoboy
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Re: Dividend Strategy Ain't For Everyone

Post by goodoboy » Sat Aug 02, 2014 5:35 pm

retiredjg wrote:
pop77 wrote:+1 . It is so easy to feed off on each other's disdain for an approach. I do have a portion of my assets in Dividend Paying and Growing stocks. I am currently in accumulation phase and do not need dividends for income. I simply reinvest them back into stocks. I do not immediately reinvest upon dividend payment as this is a cost basis nightmare, I collect them and invest them once or twice a year. This also allows me to find the cheapest stock and invest in them.

I have the following criteria for stock selection - (The most important ones)
  • Company has a well diversified set products and is also geographically diversified in terms of revenue
    ROIC at least 15% for the past 10 years
    Payout ratio less than 60%
    P/FCF less than 18 (when purchased)
    Dividend yield of 2.0% or higher
    Annualized Dividend growth rate for the past 10 years 10% or higher
    10 years of positive Free Cash Flow
I am very passive and do not sell a stock unless something drastic happens. I do not trade or do not chase dividends. Based on past history and conservative projections my DRIP portfolio will generate enough in dividends to cover my expenses 15 years from now. As the average dividend growth rate of my portfolio is in high single digits/low teens, I am all set from an inflation perspective. I know theorists will argue about single company risks but these companies are like individual countries. They generate enough revenue and profits that surpasses many countries GDP. Can companies like JNJ, PEP, KO, WMT, NSRGY, UTX, all go under or cut dividends at the same time? theoretically yes, so can the entire S&P 500 or total stock market.

Last two days is a perfect example of how a dividend investor need not worry about market corrections, If it is July 31 and market corrects 2%, the dividend investor need not even blink an eye as none of the stocks in my portfolio cut the dividends, I get paid like clockwork. For example I got WMT in 2007 at 43 dollars, here is my yield on WMT from 2008
2008-2.1%
2009-2.5%
2010-2.8%
2011-3.4%
2012- 3.8%
2013- 4.4%
2014- 4.7%
I expect the yield to just grow every year. This is an excellent inflation hedge.

I am not sure many appreciate the power of dividend growth strategy and in a way it is good for those who understand it.
I think this is a good example of both sides of the argument. Apparently this approach works for you and I trust that it will continue to do so.

But your post also illustrates exactly why this approach would be a poor one for the vast majority of investors - you have to have a higher level of knowledge to begin with and you have to work at it on a regular basis. Granted, you don't see it as work - you enjoy it. And you didn't mind learning all that stuff on the front end because you found it interesting and probably found it easy.

I don't think this is a skill that the average person on the street can master or would be interested in mastering. While I don't disparage what you are doing, it is certainly not for the average person, in my opinion. And for that reason, I'm glad we can fall back on the relatively simple approach of "own everything and keep it".
+1 I agree retiredjg, the average investor like myself cannot afford to get the dividend strategy wrong when I know step 1 and step 2 will work, with less amount of effort and time. For the simple investor out here with kids, husband/wife, hobbies, video games, its so much more easier to come close to completing step 1 and 2. Once that is done, rest of money goes to wasting on fancy things.

For the average investor implement dividend growth strategy without doing step 1 and 2 first just seems too risky in my opinion. And this is what I told my 18 year old nephew and a few other people. Get the simple things right first.

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