Thursday, September 29, 2016

Dividend Reinvestment – Automatic versus Manual

There are two schools of thought when it comes to dividend reinvestment. One of the options is to automatically reinvest dividends, whereas the other option is to selectively reinvest dividends received.

The automatic dividend reinvestment is the easiest one to do. Once you purchase a dividend paying stock, you essentially check the “dividend reinvestment” box. As a result, your dividend income is reinvested into more shares of the same stock, and you start the income compounding process. The set it and forget it type of action is particularly appealing to income investors who are just starting out and have small amounts to invest in the beginning,

Because of the fact that it is free, automatic reinvestment into more stock is most efficient for those investors. Otherwise, even at $4-$5/trade, reinvesting anything less than $800-$1000 in dividend income would be prohibitively expensive. In addition, some companies offer DRIP discounts for shareholders who automatically reinvest distributions back into more stock. Unfortunately, even if you reinvest dividends back into the same stock that paid them in a taxable brokerage account, you still owe taxes to the IRS, depending on your income level.

If you are investing in a retirement account, where contribution amounts are limited, it may also make sense to reinvest automatically, regardless of valuation. This is because it would be more cost efficient to do so, rather than accumulating cash until it makes sense to make another investment from a cost standpoint.

Tuesday, September 27, 2016

Common Misconceptions about Dividend Growth Investing

There are many misconceptions about dividend investing. I have tried itemizing several of them, outlining them, and providing a brief commentary. Dealing with viewpoints that are different from yours is very important, because it opens you up to new ideas, and tests your strategies against scenarios that you might not have thought about. Unfortunately, most of the time I deal with viewpoints which are against dividend investing, I often find the authors are only providing their opinions, without ever bothering to examine any factual evidence on the subject. It is very dangerous to have an opinion on a subject, without knowing it inside out, but sticking to your original viewpoint, even if the evidence refutes your original ideas.

As Charlie Munger says " “I never allow myself to have an opinion on anything that I don’t know the other side’s argument better than they do.” 

The misconceptions are summarized below:

Thursday, September 22, 2016

Frequently Asked Questions (FAQ) About Dividend Investing

I have highlighted below several frequently asked questions about dividend investing. This is not an all inclusive list, but more of a running total of questions I am usually asked about dividend investing, dividend growth stocks and my strategy. The answers pertain to my investing, strategy and experience, and I have tried to respond to the best of my knowledge and intentions. As I get new recurring questions asked, I would add them to this list.

Why should you focus on dividends?

A company that pays dividends is less risky than a company that has never paid a dividend. A company that pays dividends pays with actual cash, which cannot be easily manipulated like earnings. Dividends are a more stable part of total returns, and are always positive, which is what makes them ideal for retirees who want to live off their nest egg. Paying a dividend imposes discipline on management, that makes them evaluate the cash flow impacts of new projects and make them only focus on the best ideas. This dividend payment makes management less likely to engage in empire building, and less likely to simply hoard cash or mindlessly expand/acquire companies which are not accretive to returns. Few US managements are willing to cut a dividend – doing so sends signals that the company is weak financially.

Tuesday, September 20, 2016

Key Ingredients for Successful Dividend Investing

There are four key attributes that need to be considered, in order to be successful at dividend investing. These ingredients include focusing on quality, earnings growth, entry price and sustainable distributions. In this article, I would focus in more detail behind each of these four items.

While investors could argue that one cannot put success in a pre-packaged recipe for achieving it, I have found the four ingredients above to be essential for my income investing strategy.

Quality

I believe in purchasing quality dividend paying companies. This means that I try to focus on companies with strong competitive advantages, strong brand names and/or wide moats. Companies like that offer a product or service which customers desire, and are willing to pay a price which would deliver a fair profit. In addition, companies which offer products which are perceived to have quality characteristics, which typically translates into repeated purchases of the goods or services. In addition, companies that offer a unique product or service are able to compete based upon the added value they bring to the marketplace, and avoid costly price wars with competitors. Furthermore, the company would be able to have pricing power and pass on costs to customers, which will be much less likely to switch to another product. I understand that quality lies in the eyes of the beholder, but through experience, dividend investors should be able to uncover quality dividend paying gems.

Thursday, September 15, 2016

Dividend Champions - The Best List for Dividend Investors






Investors who are looking for quality stocks that regularly raise dividends have several lists available as a starting point in their research. The typical lists include the S&P Dividend Aristocrats index, which consists of 50 constituents of the S&P 500 which have raised distributions for over a quarter of a century and also have certain capitalization, liquidity requirements. Another popular list includes the Dividend Achievers Index, which includes almost all companies traded on US exchanges which have consistently raised distributions for over one decade, and which also meet a certain liquidity threshold as well. The third list, the dividend champions, is maintained by Dave Fish. This is by far the most comprehensive list of dividend growth stocks available for free. It breaks down the dividend growth universe into dividend champions, dividend contenders and dividend challengers. The list could be obtained from this link.

The dividend champions list includes all stocks traded in the US, which have raised dividends for at least twenty-five consecutive years. I prefer the dividend champions list than the dividend aristocrats index, since it is more complete and does not have artificial requirements such as index membership or minimum trading volume. These requirements are typically irrelevant to long-term dividend investors, who focus on fundamentals that could support a growing distribution, not on day to day market fluctuations. Currently there are 110 dividend champions, which yield 2.46% on average.

Some notable dividend champions include Colgate-Palmolive (CL), Procter & Gamble (PG) and Coca-Cola (KO). Colgate-Palmolive (CL) has consistently raised dividends for 53 years in a row, but for some strange reason was not included in the dividend aristocrats index until 2012. This is a great example why focusing on the dividend champions list could provide a more comprehensive selection of elite dividend stocks. Another dividend champion is Altria Group (MO). The only reason why the company is not on the dividend aristocrat list is because its dividend payment is lower due to the spin-off of Phillip Morris International (PM) in 2008 and Kraft Foods (KFT) in 2007. Other than that, the tobacco company has managed to increase dividends for 47 years in a row.

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