Companies with rising dividends

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chrismccord3571
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Companies with rising dividends

Post by chrismccord3571 »

Hello-there is an investing strategy floating around that is if you only invest in companies that consistently raise their dividends you will do very well. The companies need to have at least ten years of rising dividends and you will beat the averages. Has any body ever tried this? Any feedback will be appreciated.
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Post by Beagler »

You may find the following board of interest: http://tinyurl.com/6gcfmpa

Companies can (and do) cut their dividend payments.
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Post by rustymutt »

You can loose your wealth in a hurry chasing Dividends. Just because a company is paying out growing dividends, does not mean the principal can go down in a hurry. Bad advise.
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Post by tim1999 »

rustymutt wrote:You can loose your wealth in a hurry chasing Dividends. Just because a company is paying out growing dividends, does not mean the principal can go down in a hurry. Bad advise.
Oh come on. Just because there is a high level of diversification, there is no reason why an index fund can't go down in a hurry, either.

Investing in in stocks with rising dividends, whether through individual stocks or a fund tailored to this (and there are many), isn't exactly the worst strategy out there. I have found such stocks to be generally less volatile overall...particularly the ones paying over 2% with a beta below 1.0.
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Post by Snowjob »

I like dividends, taxes be damned.[/list]
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Post by KyleAAA »

There are several mutual funds that follow this strategy. They do not beat the averages over time.
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Post by Grt2bOutdoors »

KyleAAA wrote:There are several mutual funds that follow this strategy. They do not beat the averages over time.
The same could be said of index funds - "they do not beat the averages over time", because they are they average. Dividend investing can have a place in one's portfolio just as one is cognizant that they will not be immune from severe market downdrafts and run the risk of a dividend cut/elimination.
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Post by MP173 »

I dont chase dividend yields but am aware of the yields.

There is a considerable level of discussion on this method of investing, which means it is probably being over cooked. Whether or not the individuals have the ability to influence a bubble on these stocks, remains to be seen (I doubt it).

Dividend paying companies which keep growing their dividends have a certain formula which is generally followed. Moderate growth of revenue with good margins. Not enough growth to continue investing all of their free cash flow, so that a certain % is returned to the owners.

Good, but not spectacular growth, very good margins, and well managed. Sounds like a good avenue for investing...and it is if you select the good companies.

I have a couple of companies which are yielding 20% on original investment...these have been held for 16 years and experienced great growth.

Also, I purchased two stocks years ago in which the dividend was eliminated and those stocks are very poor performers.

So, if you have the ability to find these companies and invest at the right time and the right price, you might do well.

If you dont have that ability, or confidence in yourself, purchase the index funds and take the great, the good, the bad, and ugly...and go with market performance.

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Post by alec »

KyleAAA wrote:There are several mutual funds that follow this strategy. They do not beat the averages over time.
For example, VDIGX.

VDIGX vs. VFINX & VTSMX
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Post by Grt2bOutdoors »

alec wrote:
KyleAAA wrote:There are several mutual funds that follow this strategy. They do not beat the averages over time.
For example, VDIGX.

VDIGX vs. VFINX & VTSMX


It's nice to show comparisons - but if you are going to compare isn't it better to compare Apples to Apples, instead of Apples to a Cornucopia of Fruit Medley? :wink:

Total Stk Mkt Index is composed of large cap, small cap, midcap equities, many of them fail to yield any dividend at all. S&P 500 - largest companies,again some of the fastest growing ones fail to yield any dividend. So where is the value in your comparison?
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Post by gotherelate »

Two words of caution:

GM & BP

OK, two symbols.
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Post by KyleAAA »

GRT2BOUTDOORS wrote:
alec wrote:
KyleAAA wrote:There are several mutual funds that follow this strategy. They do not beat the averages over time.
For example, VDIGX.

VDIGX vs. VFINX & VTSMX


It's nice to show comparisons - but if you are going to compare isn't it better to compare Apples to Apples, instead of Apples to a Cornucopia of Fruit Medley? :wink:

Total Stk Mkt Index is composed of large cap, small cap, midcap equities, many of them fail to yield any dividend at all. S&P 500 - largest companies,again some of the fastest growing ones fail to yield any dividend. So where is the value in your comparison?
Because OP claimed he heard such a strategy will "beat the averages," which almost always means the S&P 500 and not some more-appropriate value index.

EDIT: Although since the fund above actually falls into the large blend category, the S&P 500 is a totally appropriate benchmark.
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Post by Stonebr »

Most of the big mutual fund companies now offer a fund that follows such a strategy. Vanguard has two. Vanguard Dividend Growth (VDIGX) is actively managed. Vanguard Dividend Appreciation Index (VDAIX) is passively managed against a Mergents index of "dividend achievers."

The idea is based on the assumption that companies that have consistently raised dividends in the past will do so in the future. (Remember what the government bureaucrats make us all say, "Past performance is no blah, blah, blah...") There were some major disruptions to these dividend increase patterns during the 2008-2009 market when long term achievers like GE and the money center banks cut or suspended dividend payments. Most died-in-the-wool Bogleheads consider this gimmick investing. Jack Bogle calls it active management in disguise and recommends sticking with the total market index funds, which already own all these companies.
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Post by fredflinstone »

is there any evidence that companies that have been consistently raising their dividends have outperformed the total market index? If so, I would like to see this evidence (links please).
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Post by jeffyscott »

Stonebr wrote:There were some major disruptions to these dividend increase patterns during the 2008-2009 market when long term achievers like GE and the money center banks cut or suspended dividend payments.
And yet funds following this sort of strategy appear to have typically declined less in that period. This can be seen in a 3 year chart of the VDIGX comparison posted above.

http://quote.morningstar.com/fund/chart ... %2C0%22%7D


Or look at the risk tab at m* and you can see, for example, VDIGX had SD of 13.20% over the last 15 years vs. the S&P 500 with SD of 16.38%
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Total Stock Market Index vs Vanguard Dividend Growth Inv

Post by fredflinstone »

During the last 10 years, Total Stock Market Index has had higher returns than Vanguard Dividend Growth Inv. The price of those higher returns has been greater volatility:

Image

I'll stick with the total market, thank you.
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Post by Scott S »

GRT2BOUTDOORS wrote:
alec wrote:
KyleAAA wrote:There are several mutual funds that follow this strategy. They do not beat the averages over time.
For example, VDIGX.
It's nice to show comparisons - but if you are going to compare isn't it better to compare Apples to Apples, instead of Apples to a Cornucopia of Fruit Medley? :wink:

Total Stk Mkt Index is composed of large cap, small cap, midcap equities, many of them fail to yield any dividend at all. S&P 500 - largest companies,again some of the fastest growing ones fail to yield any dividend. So where is the value in your comparison?
I think it's valid to compare against the fund that you would otherwise be invested in. Which is Total Market for a lot of us.

What value would there be in comparing VDIGX to... funds that are like it? :wink:

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Post by statsguy »

We began buying dividend stocks in 2004. We started replacing our Value funds (VIVAX and VASVX) with individual dividend stocks. We put about 1% of our portfolio in each stock and now have about 28% of our portfolio in these stocks. So I think it is a good idea... here is our reasoning and some of the pluses and minuses as I see them...

The main plus is cost and income. These are two characteristics of my portfolio that we can control. We want higher yields, dividend growth, and low cost. The dividend yield of our nearly 30 stocks is over 4%%. (M* underestimates the yield because M* does not keep track of the dividends from KMR (because its dividend is paid as a stock split) and AMBPRP (because it is a preferred share). Anyway here is our portfolio (editted to repair link)

If we went with a fund like VDIGX (Dividend Growth) we would get the dividend growth but not the high yield; VDIGX has a yield of only 1.8%. If we go say VHDYX (High Dividend Yield Index) you get a higher yield of 2.6% but less dividend growth. So I think we can get higher yield and higher dividend growth by holding individual stocks. Also, our turnover is much less than those funds.

Cost is another very important part of all this. Take VHDYX... the cost associated with this fund is probably higher than 0.70% (I usuually add expense ratio and turnover to get an estimate of true cost of expenses). The total cost (over the past seven years) of our portfolio since we started buying the dividend stocks is 0.21%. In seven years, the cost of VHDYX would add up to over 5%%. Put another way, if our expenses were 0.70 a year (I expect the total expenses of VHDYX are more) then that would amount to 17.5% (.7%/4%) of our yearly income from our portfolio.

Another aspect of cost is not overpaying for a particular stock. We are M* Premium subscribers plus we get the dividend investor newsletter (the subscriptions are part of the expenses for our portfolio). We use these two and some other services that we get freely from our library to help evaluate what a good price for the stock should be. When we started buying stocks we overpaid for the first three or four stocks and while their income has been good it was two years before they were worth substantially more than we paid for them. Currently, only WFC (Wells Fargo) and PFE (Pfizer) are below what we paid for them (both have losses of about 3%). These coincidentally enough (really not coincidental) are the only two stocks in our portfolio that cut their dividend in the recession.

So in order to be successful you need to buy your stocks at low prices ("low" is very subjective) and hold them essentially forever to keep costs down. We have sold four stocks, one because it became overpriced (from 5-stars at M* to 1-star) and two because they cut their dividend and one because I did not know why I was holding it (long story made short-- you should know why you own any investment).

What are the disadvantages of individual stocks?

Volatility---- When you look at your portfolio do you focus on your worst performing investment or do you look at the total portfolio. Our dividend stock portfolio as a group has about the same volatility as the 500 Index or the Value Index but the individual stocks are much more volatile. We have had stocks lose 60% of their value in three months (Wells Fargo) but it also doubled in three months only 9 months later. So partly to be successful with individual stocks you have to have an ability to focus on the bottomline... but you also have to be able to evaluate if the stock should stay in your portfolio. Wells Fargo lost so much so quickly partly because it cut its dividend.

Another negative---- are you going to want to manage a stock portfolio when you are 85? I don't even know the answer to that one but right now at 56 it is not that much work to manage the portfolio. When we have money to invest I spend lots of time thinking about the various options and I enjoy doing that. But for the most part I only look at our portfolio once a month for a few minutes to see how it is doing.

A positive... when the market was crashing during the recession, seeing all the dividends coming in like clockwork was reassuring. We had three or four dividend cuts and something like 20 dividend increases during the recession, which made it easier to sleep at night.

A negative... sometimes stocks go bankrupt. We had acouple of companies go bankrupt. Thankfully, they were small holdings. One was a stock that I bought that was pure speculation... I figured if it survived it would be be worth a lot. Bad idea... Anyway, I had Fidelity send me the stock certificates, which I framed, and they now are displayed on my study wall. They remind me not to speculate. The other was a spinoof, which technically is not bankrupt but it is selling for less than a penny a share... a long ways from $20 a share at the spin-off. I think we have 50 shares.

Think long and hard about buying individual stocks. It is my opinion they are more work, more risky, and maybe more profitable (from an income point of view)... We have been lucky in that our stocks are up more than the index. I do not believe that the strategy of investing in dividend growth funds will beat the benchmark by much over the long haul, but it is (in my opinion) a reasonable approach for investing.

Best of luck
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Last edited by statsguy on Tue Apr 26, 2011 5:22 pm, edited 2 times in total.
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Post by White Coat Investor »

GRT2BOUTDOORS wrote:
KyleAAA wrote:There are several mutual funds that follow this strategy. They do not beat the averages over time.
The same could be said of index funds - "they do not beat the averages over time", because they are they average.
Darn it! Why didn't anyone ever tell me this. WTH am I doing investing in index funds!?

Aside from the bad argument noted above, investing in a low cost, highly diversified group of high-dividend paying stocks is something many of us do. I use Vanguard's Value Index, REIT Index and Small Value Index Funds to do so. Thinking dividend investing is somehow different from value investing is just fooling yourself IMHO. Investing in just a few high dividend stocks is foolhardy. Uncompensated risk is the key concept here.
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Post by White Coat Investor »

gotherelate wrote:Two words of caution:

GM & BP

OK, two symbols.
How about GE? http://www.google.com/finance?client=ob&q=NYSE:GE

Wasn't that a dividend investor darling not too long ago? I don't care how high the yield is if the principal is going to be cut in half in a few years.

Diversification. Such an important concept for investors.
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Re: Companies with rising dividends

Post by nisiprius »

chrismccord3571 wrote:Hello-there is an investing strategy floating around that is if you only invest in companies that consistently raise their dividends you will do very well. The companies need to have at least ten years of rising dividends and you will beat the averages.
Chris, this is just an example of a stock-picking system.

The value of a share of stock is the market's judgement of the present value of its future stream of dividends. The company's dividend payments and their history is a very well-known, very public piece of data. In order to believe that that a simple mechanical rule is going to "help you beat the averages," you have to believe that

* the market doesn't pay attention to dividends, or
* hasn't noticed a dead-simple pattern between dividends and performance, or
* knows all about it but mysteriously does nothing about it.

Well, of course that's not quite true. Picking stocks with increasing dividends could just be an imprecise and sloppy way of picking "value" stocks, which do give higher return along with higher risk. These are companies that look lousy to investors, so their stock gets beaten down until they yield a higher average return than the rest of the market because of their higher risk.
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Post by HomerJ »

EmergDoc wrote:
gotherelate wrote:Two words of caution:

GM & BP

OK, two symbols.
How about GE? http://www.google.com/finance?client=ob&q=NYSE:GE

Wasn't that a dividend investor darling not too long ago? I don't care how high the yield is if the principal is going to be cut in half in a few years.

Diversification. Such an important concept for investors.
Yep, I bought GE mostly for the dividend...

That didn't work out too well. :)
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Post by Grt2bOutdoors »

rrosenkoetter wrote:
EmergDoc wrote:
gotherelate wrote:Two words of caution:

GM & BP

OK, two symbols.
How about GE? http://www.google.com/finance?client=ob&q=NYSE:GE

Wasn't that a dividend investor darling not too long ago? I don't care how high the yield is if the principal is going to be cut in half in a few years.

Diversification. Such an important concept for investors.
Yep, I bought GE mostly for the dividend...

That didn't work out too well. :)
Nope, refused to buy a company that was a highly leveraged finance company. It was the right call before '08 - however, if I had the fortitude I should have jumped on it at $6. In fact, I did through my ownership positions in Total Stk Market Index and S&P 500 indexes. :wink:
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Post by Beagler »

Some funds aren't all that bad:
Image
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Post by HomerJ »

GRT2BOUTDOORS wrote:
rrosenkoetter wrote:
EmergDoc wrote:
gotherelate wrote:Two words of caution:

GM & BP

OK, two symbols.
How about GE? http://www.google.com/finance?client=ob&q=NYSE:GE

Wasn't that a dividend investor darling not too long ago? I don't care how high the yield is if the principal is going to be cut in half in a few years.

Diversification. Such an important concept for investors.
Yep, I bought GE mostly for the dividend...

That didn't work out too well. :)
Nope, refused to buy a company that was a highly leveraged finance company. It was the right call before '08 - however, if I had the fortitude I should have jumped on it at $6. In fact, I did through my ownership positions in Total Stk Market Index and S&P 500 indexes. :wink:
Believe me, at the time $6 just seemed like a road bump on the way to $3...

I bought at $30, $20, and $10... If it had hit $5, I might have bought more... maybe...

It's back at $20 now... still 50% below it's peak of $40 just a few years ago... I almost broke even... and realized that stock-picking isn't a game for me

My real point is that buying stocks for the dividend doesn't always work... I remember thinking "Well, at least I still get the dividend", and then GE cut the dividend to zero, AND the stock was down 75%...
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Post by MP173 »

Stats:

Great review of the pro's and con's of individual stocks. I really like your comment of knowing why you purchase a company.

While I dont have your depth of holdings (18 or 19 now) and mine are a bit more concentrated (my long term holdings are much larger), your comments on diversification rings true. Like you, Pfizer has been a loser for me, actually my only one. I keep looking at Johnson & Johnson and want to jump sideways but havent yet.

There is a Little Book of Sideways Markets which covers this type of investing quite well.

The author, Vitaliy Katsenelson, states one must look for Q+V+G for success. Quality + Value + Growth. I would highly recommend anyone wanting to move in this direction read this book. Quick and easy to read yet has all the info.

Ed
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Re: Total Stock Market Index vs Vanguard Dividend Growth Inv

Post by Snowjob »

fredflinstone wrote:During the last 10 years, Total Stock Market Index has had higher returns than Vanguard Dividend Growth Inv. The price of those higher returns has been greater volatility:

Image

I'll stick with the total market, thank you.
Also note that it used to be the Utility index untill begining of 2004 (I think)
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Post by White Coat Investor »

MP173 wrote:Stats:

Great review of the pro's and con's of individual stocks. I really like your comment of knowing why you purchase a company.

While I dont have your depth of holdings (18 or 19 now) and mine are a bit more concentrated (my long term holdings are much larger), your comments on diversification rings true. Like you, Pfizer has been a loser for me, actually my only one. I keep looking at Johnson & Johnson and want to jump sideways but havent yet.

There is a Little Book of Sideways Markets which covers this type of investing quite well.

The author, Vitaliy Katsenelson, states one must look for Q+V+G for success. Quality + Value + Growth. I would highly recommend anyone wanting to move in this direction read this book. Quick and easy to read yet has all the info.

Ed
What's his definition of quality? Wide moat? So vague. Much like the quality stock forecasts from GMO.
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Post by Grt2bOutdoors »

rrosenkoetter wrote:
GRT2BOUTDOORS wrote:
rrosenkoetter wrote:
EmergDoc wrote:
gotherelate wrote:Two words of caution:

GM & BP

OK, two symbols.
How about GE? http://www.google.com/finance?client=ob&q=NYSE:GE

Wasn't that a dividend investor darling not too long ago? I don't care how high the yield is if the principal is going to be cut in half in a few years.

Diversification. Such an important concept for investors.
Yep, I bought GE mostly for the dividend...

That didn't work out too well. :)
Nope, refused to buy a company that was a highly leveraged finance company. It was the right call before '08 - however, if I had the fortitude I should have jumped on it at $6. In fact, I did through my ownership positions in Total Stk Market Index and S&P 500 indexes. :wink:
Believe me, at the time $6 just seemed like a road bump on the way to $3...

I bought at $30, $20, and $10... If it had hit $5, I might have bought more... maybe...

It's back at $20 now... still 50% below it's peak of $40 just a few years ago... I almost broke even... and realized that stock-picking isn't a game for me

My real point is that buying stocks for the dividend doesn't always work... I remember thinking "Well, at least I still get the dividend", and then GE cut the dividend to zero, AND the stock was down 75%...
I hold over 30 companies as part of a dividend portfolio - of those, I've had one temporarily eliminate the dividend. At the time of purchase, I knew there waa an extremely high likelihood of the elimination, however the value of the total company after "known" liabilities exceeded the market cap. I bought it, I lost a years worth of dividends, but picked up substantially more in unrealized capital gains.

Of the remaining ones, they have all increased the dividends, some substantially - you don't have to buy a significant amount - think of them as seeds - some will grow, some may die - you want to cull those before they do, some will surprise you. I have one that has grown the dividend 48 fold from the year of initial purchase 12.5 years ago, capital appreciation has been nearly 8 fold (I believe if compared to VTSMX one could say it has blown the socks off it performance wise :wink: ). It started out as a small cap and is now in the mid range mid cap level. It is by no means a "high yielding" company, unless of course you held it - it's now yielding 20% per annum. Of course, for everyone that's a grand slam, there are always a few dogs hanging out at the back of the pack. Still, as long as they have reasonable growth prospects and are valuey, I keep them. :wink:
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Post by MP173 »

Emerdoc:

Quality and "wide moat" go hand in hand. Nothing vague about it.

I just returned the book to the library, but if several quantifiable issues regarding "quality":

1. Quality of the balance sheet. Easily verifiable, either by comparing a few items or reading a report. How much debt? How much equity? What is the current ratio? What about off balance sheet items? Or take a look at S&P credit ratings. currently Exxon and Johnson and Johnson have AAA ratings, along with the US Treasury. This reduces significantly their cost of capital...if needed.

2. Quality of earnings...again this can be quantifiable by looking at annual reports, Morningstar, or Value Line reports. Are the earnings steadily consistent? What about one time charges? GE was notorious for cooking books to hit the numbers. Margins consistent?

3. Free cash flow...is it a high % of revenue? Of the operating cash flow, what does the company do with it? Invest in the company or return to the owners? In what form is it returned to the owners? Share buybacks or dividends? Buybacks have their own issues, particularly if they are used to offset options. My standards are a minimum of 5% fcf/revenue. JNJ has a whopping 22% of their revenue as FCF. That provides a printing press for dividend increases...or something to do with that $$$.

4. Returns. As discussed above, what are the net margins on revenue? But, more importantly, what is the return on equity? How are those returns produced (return on capital, turnover of assets, and financial leverage)? Obviously higher ROE is desired...but not at the expense of high financial leverage (with lots of debt).

5. Is their revenue defendable and have a "moat"? A little more difficult to answer, but not impossible. Compare two companies that both produce food/beverages. One is ADM which takes corn and soybeans and does things to those items, such as make HFCS or ethanol. Both are commodities and are subject to pricing swings. Coca Cola, on the other hand invests heavily in their marketing and has created a brand awareness. Their moat is solid. So are their returns.

6. Finally, it is important to consider a company's payout ratio. How much of their net income is paid out as dividends. Below 60% is considered safe.

So, this does take work. It isnt for everyone. Once you decide on a company, the monitoring is rather easy.

Ed
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Post by tibbitts »

MP173 wrote:Emerdoc:

Quality and "wide moat" go hand in hand. Nothing vague about it.

I just returned the book to the library, but if several quantifiable issues regarding "quality":

1. Quality of the balance sheet. Easily verifiable, either by comparing a few items or reading a report. How much debt? How much equity? What is the current ratio? What about off balance sheet items? Or take a look at S&P credit ratings. currently Exxon and Johnson and Johnson have AAA ratings, along with the US Treasury. This reduces significantly their cost of capital...if needed.

2. Quality of earnings...again this can be quantifiable by looking at annual reports, Morningstar, or Value Line reports. Are the earnings steadily consistent? What about one time charges? GE was notorious for cooking books to hit the numbers. Margins consistent?

3. Free cash flow...is it a high % of revenue? Of the operating cash flow, what does the company do with it? Invest in the company or return to the owners? In what form is it returned to the owners? Share buybacks or dividends? Buybacks have their own issues, particularly if they are used to offset options. My standards are a minimum of 5% fcf/revenue. JNJ has a whopping 22% of their revenue as FCF. That provides a printing press for dividend increases...or something to do with that $$$.

4. Returns. As discussed above, what are the net margins on revenue? But, more importantly, what is the return on equity? How are those returns produced (return on capital, turnover of assets, and financial leverage)? Obviously higher ROE is desired...but not at the expense of high financial leverage (with lots of debt).

5. Is their revenue defendable and have a "moat"? A little more difficult to answer, but not impossible. Compare two companies that both produce food/beverages. One is ADM which takes corn and soybeans and does things to those items, such as make HFCS or ethanol. Both are commodities and are subject to pricing swings. Coca Cola, on the other hand invests heavily in their marketing and has created a brand awareness. Their moat is solid. So are their returns.

6. Finally, it is important to consider a company's payout ratio. How much of their net income is paid out as dividends. Below 60% is considered safe.

So, this does take work. It isnt for everyone. Once you decide on a company, the monitoring is rather easy.

Ed
The question remains that if these qualities are important, and should produce superior returns, and are identifiable with some work, why can't professional managers of dividend growth funds consistently outperform broader market averages?

Paul
theresa
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Post by theresa »

I bought Washington Mutual for the dividend. I got to take a loss that year on my taxes.

Theresa
MP173
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Post by MP173 »

Paul:

Good question, perhaps those managers should be asked that question.

Ed
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HomerJ
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Post by HomerJ »

MP173 wrote:Paul:

Good question, perhaps those managers should be asked that question.

Ed
Perhaps it's not really as easy as you think. Perhaps.
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Post by 4stripes »

MP173 wrote:Good question, perhaps those managers should be asked that question
In my limited but growing knowledge, perhaps because they are handicapped by the significant size of assets under management. They're essentially limited to large companies and what other funds are doing, or if not, their huge purchases of small caps are quickly copied by other investors and the advantage disappears. Or they just can't trade in those because there isn't enough volume/liquidity in those companies.
MarginOfBuffett
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Post by MarginOfBuffett »

statsguy wrote:We began buying dividend stocks in 2004. We started replacing our Value funds (VIVAX and VASVX) with individual dividend stocks. We put about 1% of our portfolio in each stock and now have about 28% of our portfolio in these stocks. So I think it is a good idea... here is our reasoning and some of the pluses and minuses as I see them...

The main plus is cost and income. These are two characteristics of my portfolio that we can control. We want higher yields, dividend growth, and low cost. The dividend yield of our nearly 30 stocks is over 4%%. (M* underestimates the yield because M* does not keep track of the dividends from KMR (because its dividend is paid as a stock split) and AMBPRP (because it is a preferred share). Anyway here is our portfolio (editted to repair link)

If we went with a fund like VDIGX (Dividend Growth) we would get the dividend growth but not the high yield; VDIGX has a yield of only 1.8%. If we go say VHDYX (High Dividend Yield Index) you get a higher yield of 2.6% but less dividend growth. So I think we can get higher yield and higher dividend growth by holding individual stocks. Also, our turnover is much less than those funds.

Cost is another very important part of all this. Take VHDYX... the cost associated with this fund is probably higher than 0.70% (I usuually add expense ratio and turnover to get an estimate of true cost of expenses). The total cost (over the past seven years) of our portfolio since we started buying the dividend stocks is 0.21%. In seven years, the cost of VHDYX would add up to over 5%%. Put another way, if our expenses were 0.70 a year (I expect the total expenses of VHDYX are more) then that would amount to 17.5% (.7%/4%) of our yearly income from our portfolio.

Another aspect of cost is not overpaying for a particular stock. We are M* Premium subscribers plus we get the dividend investor newsletter (the subscriptions are part of the expenses for our portfolio). We use these two and some other services that we get freely from our library to help evaluate what a good price for the stock should be. When we started buying stocks we overpaid for the first three or four stocks and while their income has been good it was two years before they were worth substantially more than we paid for them. Currently, only WFC (Wells Fargo) and PFE (Pfizer) are below what we paid for them (both have losses of about 3%). These coincidentally enough (really not coincidental) are the only two stocks in our portfolio that cut their dividend in the recession.

So in order to be successful you need to buy your stocks at low prices ("low" is very subjective) and hold them essentially forever to keep costs down. We have sold four stocks, one because it became overpriced (from 5-stars at M* to 1-star) and two because they cut their dividend and one because I did not know why I was holding it (long story made short-- you should know why you own any investment).

What are the disadvantages of individual stocks?

Volatility---- When you look at your portfolio do you focus on your worst performing investment or do you look at the total portfolio. Our dividend stock portfolio as a group has about the same volatility as the 500 Index or the Value Index but the individual stocks are much more volatile. We have had stocks lose 60% of their value in three months (Wells Fargo) but it also doubled in three months only 9 months later. So partly to be successful with individual stocks you have to have an ability to focus on the bottomline... but you also have to be able to evaluate if the stock should stay in your portfolio. Wells Fargo lost so much so quickly partly because it cut its dividend.

Another negative---- are you going to want to manage a stock portfolio when you are 85? I don't even know the answer to that one but right now at 56 it is not that much work to manage the portfolio. When we have money to invest I spend lots of time thinking about the various options and I enjoy doing that. But for the most part I only look at our portfolio once a month for a few minutes to see how it is doing.

A positive... when the market was crashing during the recession, seeing all the dividends coming in like clockwork was reassuring. We had three or four dividend cuts and something like 20 dividend increases during the recession, which made it easier to sleep at night.

A negative... sometimes stocks go bankrupt. We had acouple of companies go bankrupt. Thankfully, they were small holdings. One was a stock that I bought that was pure speculation... I figured if it survived it would be be worth a lot. Bad idea... Anyway, I had Fidelity send me the stock certificates, which I framed, and they now are displayed on my study wall. They remind me not to speculate. The other was a spinoof, which technically is not bankrupt but it is selling for less than a penny a share... a long ways from $20 a share at the spin-off. I think we have 50 shares.

Think long and hard about buying individual stocks. It is my opinion they are more work, more risky, and maybe more profitable (from an income point of view)... We have been lucky in that our stocks are up more than the index. I do not believe that the strategy of investing in dividend growth funds will beat the benchmark by much over the long haul, but it is (in my opinion) a reasonable approach for investing.

Best of luck
Stats
How do you determine the weights for each stock in your portfolio?

Thanks,
MofB
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Post by MP173 »

Rrosenkoetter:

I know it is not that easy. This discussion comes up about once a week and in each discussion I tend to outline the work involved. That outline will always state there is a need for diversification and that well managed mutual funds (index) are the correct decision for most people.

Look, I have been lucky and understand that. But along with that luck has been considerable amount of experience (I rode a stock to $0). I own index funds and ETFs. I also own managed funds in my 401k and my wife owns managed funds in her 403b.

This is something that I always wanted to do and 15 years ago the opportunity was there to do it. Commissions were high and my funds were low, so along with mutual funds (I read John Bogle's book in the late 90's and made a move to index funds when available), I invested a few $$$ monthly into DRP programs. Got lucky with most of them...perhaps.

Or perhaps it was the screening process. Not so many DRP and direct buy companies out there at that time. Plus it was a lot of work. Exxon was simple...send a check for $250 and then invest a few dollars. McDonalds, Emerson, and Illinois Central took quite a bit of work (buy a share, transfer it, etc). It really took quite a bit of work and I made sure of what I was buying.

Here is where I really benefitted...by taking this interest in this, I became my own financial analyst and not only took a look at individual companies, but also the mutual funds that I held and were available to me. By reading annual reports, doing the research on Morningstar and Value Line, and reading the financial porn, it caused me to develop an plan.

This forum took it to the next level for me...the amount of knowledge out here is thru the roof.

So, perhaps it isnt as easy as I think. But the bar has already been set pretty high.

Thanks,

Ed
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Post by abuss368 »

As Mr. Bogle so often notes, all stocks have reversion to the mean over time.
Grt2bOutdoors
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Post by Grt2bOutdoors »

abuss368 wrote:As Mr. Bogle so often notes, all stocks have reversion to the mean over time.
What is the mean for ExxonMobil? :?

The point being "over time" could be alot longer than you and I will be here on this planet. If you took the cumulative value of initial investment in "two of the seven sisters" you will find the growth has been exponential over time.
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Post by statsguy »

MarginOfBuffett wrote:
How do you determine the weights for each stock in your portfolio?

Thanks,
MofB
Essentially we equal weight and let the market decided the rest. Our actual process is...

We initially buy 1% of our portfolio when purchasing a stock.

When a stock underperforms the portfolio and drops to about 0.5% of our portfolio we take a look at it. KMB (Kimberly Clark) one of original purchases fell to about 0.5% of our portfolio and we like the stock despite very little increase in share price... so we plan to buy some more when we have money and it is cheap. KMB is one of three stocks that I think we overpaid for when we bought them... and that is one of the reasons we have seen little growth in this investment.

When a stock outperforms and grows to more than 2.5% of our portfolio we sale half and reinvest somewhere else. This has happened a couple of times... most recent was CMP (Compass Minerals).

We also sell when a stock becomes over-valued, approximately when M* rates is 1*.

Right now, all our stocks are between 0.4% (KMB) and 1.7% (CMP) of our portfolio. Want to buy some KMB... and no stocks are 1* rated... though SPH (Suburban Propane) is getting close. A back of the envelope calculation indicates we would sell around $68 per share (M* says consider selling at $64.40)

Stats
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Post by jmbkb4 »

gotherelate wrote:Two words of caution:

GM & BP

OK, two symbols.
I'll add some:

BAC
JPM
WFC
C
GS

....
Grt2bOutdoors
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Post by Grt2bOutdoors »

jmbkb4 wrote:
gotherelate wrote:Two words of caution:

GM & BP

OK, two symbols.
I'll add some:

BAC
JPM
WFC
C
GS

....
They are all in similar related business - banking (commercial and investment banking). For every one you name that has eliminated, one could easily name ten that have consistently raised them, in fact, those companies are known as Dividend Aristocrats. There are more than ten of those Aristorcrats out there.
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HomerJ
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Post by HomerJ »

GRT2BOUTDOORS wrote:
jmbkb4 wrote:
gotherelate wrote:Two words of caution:

GM & BP

OK, two symbols.
I'll add some:

BAC
JPM
WFC
C
GS

....
They are all in similar related business - banking (commercial and investment banking). For every one you name that has eliminated, one could easily name ten that have consistently raised them, in fact, those companies are known as Dividend Aristocrats. There are more than ten of those Aristorcrats out there.
I think the point is, that the ones named above had consistently raised dividends for years too... right up until the day they eliminated them.

Your point that they are all in the same sector is a good one though.

GE, I knew had a huge financial arm, but I thought it was diversified enough in services and manufacturing to survive... But it's dividend got elminated too, after years of raising them... Was it known as a Dividend Aristocrat once?
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Post by Sidney »

When did GE eliminate the dividend?
I always wanted to be a procrastinator.
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Post by Nummerkins »

rrosenkoetter wrote: GE, I knew had a huge financial arm, but I thought it was diversified enough in services and manufacturing to survive... But it's dividend got elminated too, after years of raising them... Was it known as a Dividend Aristocrat once?
My GE dividend just showed up in my account a few days ago.
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Post by statsguy »

In June 2009 (the dividend paid in July 2009) GE cut their dividend from 0.31 to 0.10. In Oct 2010 they raised it to 0.12, and again in January to 0.14. It has a long ways to go to get back to $1.24 a share (currently at 56 cents a share).

Stats
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HomerJ
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Post by HomerJ »

Sidney wrote:When did GE eliminate the dividend?
Sorry, I misspoke...

Eliminated is incorrect... It went from $1.24 a share to $0.40 a share... It's currently back to $0.60 a share (last quarterly dividend was $0.15)

Share price is also down 50% from it's peak 3-4 years ago... it hasn't recovered like the general stock market has...

GE is definitely been considered a blue-chip stock for decades, and has paid a dividend for over 100 years...

Yet anyone who invested money in it before the crash is down.

http://www.ge.com/investors/stock_info/ ... story.html
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Post by Grt2bOutdoors »

rrosenkoetter wrote:
Sidney wrote:When did GE eliminate the dividend?
Sorry, I misspoke...

Eliminated is incorrect... It went from $1.24 a share to $0.40 a share... It's currently back to $0.60 a share (last quarterly dividend was $0.15)

Share price is also down 50% from it's peak 3-4 years ago... it hasn't recovered like the general stock market has...

GE is definitely been considered a blue-chip stock for decades, and has paid a dividend for over 100 years...

Yet anyone who invested money in it before the crash is down.

http://www.ge.com/investors/stock_info/ ... story.html
If investing in individual equities - it really pays to do a thorough analysis of the company financials. It is not enough to look at Mergent's list and say "hey, it's a Dividend Aristocrat - let me buy some". The list is merely a starting point. GE was masquerading as an industrial company, the reality of it was the vast majority of earnings growth and profitability was based on finance company transactions and it all came crashing down when credit dried up. Analyze many of the "industrial" companies that own financing arms - GM, Ford, Caterpillar, Deere; see what lurks under the hood - finance is a BIG, BIG business. When operating and financing cash flow dries up for these companies, the dividends will come to a crashing halt along with the earnings.
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Post by partisan »

fredflinstone wrote:is there any evidence that companies that have been consistently raising their dividends have outperformed the total market index? If so, I would like to see this evidence (links please).
S&P has an index, the dividend aristocrats, companies that have been increasing their dividends for 25 years straight.

http://www.standardandpoors.com/indices ... --p-us----

Here is the factsheet from 2008 with some longer term performance figures: http://www2.standardandpoors.com/spf/pd ... tsheet.pdf

The current data is available from S&P in a spreadsheet, I don't have the time to plug it in and compare it to the S&P500, but if someone else wants to undertake this I'd be interested in the results. I notice the stocks didn't fall as far as the S&P500 during 2008 which is interesting to note.
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Post by MP173 »

Financing is a big part of many companies. Thanks for pointing that out.

I learned this a couple of years ago when Harley Davidson was added to my holdings. Not only did the recession hit their revenues and earnings, but they also had a financing arm which had difficulties.

I am down about 10% on my investment (from 2007).

Oh yeah, the dividend got slashed too. These are the risks one takes for holding individual stocks.

At least I can boast that I own Harley (without saying the stock, not a motorcycle).

Ed
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