Wednesday, January 20, 2016

Seven Things I Know For Sure About Dividend Growth Investing

While reading Rainn Wilson's autobiography The Bassoon King (affiliated link), I enjoyed his list of the ten things he knows for sure. Apparently, the 'things you know for sure' concept was based on a question that Gene Siskel asked Oprah that resulted in her own introspective knowledge sharing. Although I continue to make many mistakes as an investor and learn from them, I wanted to share the below list of things I know for sure about dividend growth investing in hopes that it might help some readers.

1. Avoid Chasing Yield 
My main objective as a dividend growth investor is to build myself a sustainable, growing income stream to help cover my expenses. Although it is tempting to buy a company with a high yield in order to temporarily boost my income stream in the short-term, it is risky for the stream's long-term sustainability. In order to avoid potential dividend cuts, every time I find myself interested in a security yielding over 5%, I ask myself if I am chasing sucker yield. Examining the trend in the firm's payout ratio and cash flow statement can help avoid chasing yield. 

2. All Other Things Equal, Yield > Growth 
Although I respect dividend growth investors with Visa, Apple and other low dividend yield, high dividend growth companies in their portfolios, I prefer yield over growth. Why? It takes a company yielding 1% and growing distributions by 20% per year a total of nine years to achieve a yield on cost of 5%. In contrast, choosing a mature company with a 5% dividend yield that grows their payout at 3% and holding it for the same nine years results in a yield on cost of 6.5%. Many things have to go right for a company to grow their dividend at 20% a year for nine years, while maintaining a 3% growth rate is more easily achievable. 

3. Fight Confirmation Bias
There are some companies that are very popular within the dividend growth blogging community (i.e. IBM, Emerson, AT&T, and formerly Kinder Morgan). In order to counter-balance the positive comments that many dividend bloggers express about these companies, I have started to read more widely in order to fight confirmation bias. This strategy can be as simple as reading the negative comments on a Seeking Alpha article related to a company or asking an equity analyst with a 'Sell' recommendation on that company for a copy of their latest report. Independent assessment of a company's prospects helps you make informed, unbiased investment decisions.

4. Establish and Follow Your Own Plan
Every investor has different goals, life circumstances, risk tolerance and timelines that require a customized investment plan. The most popular page on this blog is my investment holdings, which is ironic given that the list is only truly relevant for me. Having a personal investment plan and following that plan can help maintain motivation when market conditions are challenging.

5. Focus on the Long-Term
It is very easy to get caught up in the day-to-day market swings given the 24-hour news cycle. Tuning out the noise and focusing on long-term trends and goals has been the key to the success I have experienced as a dividend growth investor. For instance, although I know the market is down today, I choose to see it as an opportunity to buy great businesses at better prices than yesterday. Although I am aware of the trend in oil prices and its impact on the companies in my portfolio, I continue to think that betting against an increase in the price of a scarce resource would be foolish in the long-term.

6. Do Not Blindly Trust Management
Instead of pointing out management teams that I feel lied to investors in the recent past, it is more productive to question why investors trusted management in the first place. Although I continue to think that management can be an untapped tool for investors, I have learned to take what management says with skepticism until they prove deserving of my trust. Consider management's motivation for making statements and determine if their interests are aligned with yours. 

7. Always be Open to Learning New Things
My high school principal promoted the concept of being a life long learner. It is amazing what happens when you open yourself up to learning new things and undertaking different experiences. Being open to new ideas and experiences has resulted in my personal growth and increased satisfaction. Even if I make mistakes and experience negative events from time-to-time, being open allows me to appreciate the journey and not become fixated on the destination.

The above list encompasses the knowledge I posses regarding dividend growth investing summarized in seven principles. My bet is that the list will change over time as I continue to grow and experience new things as a dividend growth investor. 

Do you have any additions or subtractions to the above list? 













2 comments:

  1. Others...? Dividend income should be generally growing, but the principle may be bouncing up & down.
    D4s

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    Replies
    1. Good catch Div4Son! I have a planned sale or two coming this year that will cause a decrease, but that will ultimately lead to a safer stream in the long-term.

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