Wednesday, March 17, 2010

The right time to buy dividend stocks

With the market getting overextended for several months now, and my unwillingness to chase many dividends stocks, it is time to reflect on whether I am doing the right thing or not. Some stocks such as Emerson Electric (EMR) and Realty Income (O) which I was going to add to either in March or in April are trading at valuations that seem richer than what I am willing to pay for at the time.

After writing dividend growth investor blog for over two years now, I have been able to observe investor reaction to my posts. My main source of ideas for improvement has always been with comments which offer some sort of criticism, be it constructive or not. It is understandable however that one cannot please everyone, and as a result I have pretty much kept at my ideas that dividend growth investing is a superior investing strategy for investors at all stages in their life. One of the largest criticisms that I often receive is from investors with a short-term vision in mind. Back in early 2008, the problem for owning US stocks was the weakening of the US dollar and the rise in oil prices. Somehow all commodity rich developing countries which were selling natural resources at inflated prices were being touted as the next big thing. Of course once the bubble collapsed in 2008, many countries such as Russia were hit hard and the lack of diversification in their economies was much evident.

Back in late 2008 and early 2009 most investors were constantly being bombarded with negative stories about the end of buy and hold and the death of dividend investing after a record number of dividend cuts occurred. Of course it is difficult to separate the short-term noise, from the long term story behind the economy or a particular business. The truth is that in order to be successful in investing, one should stick to a certain strategy through thick and thin. Thinking too often could cause investors to deviate from their plans, and suffer from consequences as a result. Famous speculator Jesse Livermore once said that money is made by sitting, not by thinking. It is uncommon to find men who are both right and sit tight as well.

The first few months of the bear market recovery that began in March 2009 were characterized by bears speculating about a double dip recession, nationalization of major banks etc. After a few months of stocks hitting new 52 week high however, the risk of missing out on the rally and having to pay higher prices in the future if money is not deployed now is increasing every day.

Warren Buffett had mentioned in one of his letter sto shareholders that he would rather buy an excellent business at a fair price, rather than purchase a lousy business at a fire sale price. Speaking of the two companies I mentioned above, I have to decide whether they are excellent business trading at rich valuation, or whether they represent average businesses trading at inflated prices.

My strategy for my dividend portfolio is to dollar cost average my way into approximately ten stocks per month, reinvesting dividends selectively and building a diversified portfolio.

The truth of the matter is that if I keep following my strategy, it shouldn’t really matter in the long run whether I purchased Emerson (EMR) at 45 or at 48. This should hold true as long as I do not have more than 3 or 4% allocated to that position and as long as the company is able to generate a sufficient enough earnings growth to power up the dividend hikes into the next decade. Time and again I have noticed how some of the best dividend growth stories ever such as Gillette, Geico, Wal-Mart (WMT) or McDonald’s (MCD) didn’t yield much, yet they had outstanding competitive advantages and solid dividend and earnings growth. Currently Emerson Electric (EMR) and Realty Income (O) offer their lowest yields in many months, which coupled with the low dividend growth as of lately make them a pass until the next dip in prices. However, given the fact that there is seldom any “perfect time” to deploy cash, I would definitely add to those two positions on the next dip.

This article was included in the Carnival Of Personal Finance #249: Who’s Awesomest? Pirates Vs Ninjas Vs Nuns Vs Robots Vs Real Estate Agents Vs Zombiess

Full Disclosure: Long EMR, MCD, O and WMT

Relevant Articles:

- Realty Income (O) Dividend Stock Analysis
- Ten Dividend Kings raising dividends for over 50 years
- Buffett the dividend investor
- Should you re-invest your dividends?


  1. It does matter whether you buy at 45 or 48. At 45 it is a 3.0% yield and at 48 it is a 2.8% yield. At 48, you've already given up the next year's worth of dividend increase (assuming a typical raise of 7% which is probably right since it took them ten years to last double the dividend).

    On the other hand, it doesn't matter whether you buy at 45 or 48 because either price is too high for EMR which is trading at about 20x earnings, especially if you think in the next 10-20 years the economy will grow slower than the previous 10-20. I'm not willing to buy it at a 5 (or even a 6%) earnings yield.

    I share your frustration that some of our dividend stocks have run away from us but my experience has been that chasing valuations leads to poor returns. I'll be patient and look in other areas. FWIW, at various times in 2010 I've bought XOM, KO, MKC, PEP, KMB, CVX, ARKR and CAW, but even most of those have moved outside where I would buy them.

    BTW, I've had your blog bookmarked for some time now and enjoy reading it. Keep up the good work!

  2. How do you determine when to buy on a dip? I would think waiting for a dip with relatively stable, solid dividend companies like these would normally lead to buying at a higher price on average?

  3. I've been following your blog for quite sometime and have few questions regarding your strategy.

    What is your performance like over the past two years?

    Given that you dollar-cost into ten stocks per month, what is your cost percentage (fee)? Assuming you invest $10,000 per month with transaction fee of $10 / trade, that amount to 1% per month.


  4. Have you read "Value Averaging," by Michael Edelstein. I recommend that serious investors read it at least once. It provides a disciplined framework for putting into practice a "buy low/sell high" strategy, whereas most people only practice the "buy" side of dollar cost averaging. William Bernstein has a good overview of the book on his site, efficientfrontier dot com.

  5. Anon1,

    If EMR double dividends over the next decade it shoudln't really matter whether my yield on cost is 5.6% or 6%. But I do agree that every little bit might count and also that EMR is overvalued right now.


    Dips to me are typically characterized by entry yield of 3% or above.. For Realty Income the dip would be a move below 28 . Ideally I would enter Realty around $25...


    My performance has been good, and I have outperformed the markets since 2008 ( since I started wrting this blog). My costs are zero since I use Zecco, which give you 10 free trades/month if you qualify.


    No I haven't read the book. Will check out the sumamry you provided.

    To all:

    Thanks for commenting!

  6. I feel that EMR is a bit too highly valued right now. I own it in my portfolio, and think it's a great company, though I bought it at a much lower valuation than it is currently at. I'm holding it, because I think they'll do well over the next decade, love the dividend, and certainly don't think it's a sell, but I'm not buying more shares either.

    I think entry price matters very much. Even a tiny percentage point that doesn't seem like much can snowball into a ton of money 20 years down the line. Every extra percent of annual return will turn into several thousands of dollars later.

    There are dividend companies out there that are worth looking into, especially in the smallcap space. I like NPK right now.

  7. If a stock is still passing your 3% yield test, and you are confident in its future growth, then a small difference in price shouldn't matter much over the long haul. If you try too hard to get the best price, you might become guilty of trying to time the market.

    Even though stock prices are way up since the 2009 lows, I think you can still find some good ones that are "on sale" compared to their historical yields. For example, JNJ's div yield, even at $65, is a lot better than at almost any point in the past 10 years.

    That said, if you believe there's a good chance of a broad mkt downturn ahead, you could park some cash in a utility company... if a "correction" doesn't happen, then hey, you still got a fat (PEG) or (ED) dividend.

  8. Thanks for a great post. I can't help but think I'm in a similar position as yourself with an added twist. I'm looking to deploy my cash in a number of high quality dividend paying stocks seeing as how the strategy has worked well so far. The added twist is that, as a Canadian investor, with a Canadian dollar that I think will break par with the American dollar (and stay there for a long time), I'm looking for Canadian high-quality dividend stocks or relatively faster growing international dividend stocks that can outpace the appreciation of the Canadian dollar and make up for the the dividend witholding tax.

    Have you written anything on high quality Canadian companies?


  9. dividend paying stocks have the potential for both capital gain and income production. In order to provide potential capital growth, income, and protection against the erosion of purchasing power, we must buy the best dividend growth stocks and hold them for a very long time.

  10. Dividend Growth Investor,

    Really awesome site here, I bookmarked it.

    I recently read The Ultimate Dividend Playbook and I have to say the concept really makes sense to me and it seems practical enough an individual can do the necessary research and while being a normal person balancing a job and family etc..

    One point I am having trouble on is determining when a good time to buy is. I noticed in your company analysis posts you say at what price you would buy.

    How do you arrive at this number? Once I get that part down I think I have a fairly good grasp on everything else. Thanks!

  11. Thanks for the reply to my question on buying on dips! That makes sense.


  12. Are there any trends or tactics to trading that I should stay CLEAR of? I'm new to the stock market, so I'm trying to take in as many tips and advice as I possibly can.


Questions or comments? You can reach out to me at my website address name at gmail dot com.

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