Tuesday, November 27, 2012

Buy and Hold means Buy and Monitor

There are many misconceptions regarding dividend investing. One other misconception revolves around the fact that dividend investors simply buy stocks and forget about them. According to this theory, investors tend to purchase stocks just for the dividend, and then enjoying the stream of dividend payments, while losing focus of the underlying fundamentals of their investment until it is too late.

In reality, few dividend investors actually purchase income stocks purely for their dividends. Experienced dividend investors have learned, mostly through practice, that successful dividend investing is focused on continuous analysis of new or existing investments. Some of the greatest dividend growth stocks today, could become the pariash on Wall Street within a few short years, if it runs into financial trouble. As a result, serious dividend investors should keep a close tab on their portfolios of income securities.

In general, dividend investors in both the accumulation or distribution phases, need to pay close attention to their investments. Investors in the accumulation stage, need to analyze existing positions in order to determine whether it is worth it to put new capital to work. Investors in both stages should asses the fundamental picture of their stocks in order to determine whether it makes sense for them to keep holding on or whether it makes sense to sell. During an average investor’s timespan, I expect that they would have to deal with hundreds of investment decisions.

I typically end up selling dividend stocks when one of these three scenarios occurs. I do however perform plenty of work on the companies I own, in order to determine whether I should buy, hold or sell a given position. I try to analyze income stocks I own at least once per year. In addition, I also keep abreast of major developments such as mergers and acquisitions, spin-offs, dividend announcements and annual reports releases. I also scan the market for stocks that are attractively valued, since I tend to allocate a certain amount each month to my dividend portfolio. In addition, I do not automatically reinvest dividends, but tend to reinvest distributions when they reach a certain threshold in the same or different dividend stock.

While this sounds like a lot of work, in reality, once an investor has done the initial level of prep work related to a new investment, there should not be as much to be done in future years. After all, a company such as Coca-Cola (KO), Chevron (CVX) or Procter & Gamble (PG) are not going to significantly change their business models every year or so. In reality, even a detailed qualitative analysis of either of these wide-moat stocks from 5 years ago would be valuable today, and only has to be updated for the most recent financial performance in order to determine what investment action needs to be taken. It is typically the qualitative factors that might lead to deterioration in financial conditions of otherwise strong companies.

Investors should therefore try to assess the viability of their stocks ability to produce a dependent stream of dividends in order to protect their total dividend income and protect their principal. For example, many financial stocks such a Bank of America (BAC) were favored amongst dividend growth investors for their reliable dividend increases, as well as above average yields. Unfortunately, as the US economy worsened in 2008, and the number of delinquent borrowers increased, the stock prices and dividend payments in financial companies dropped significantly. However, investors who sold when dividends were cut, and invested proceeds in other quality dividend payers, fared well despite the turbulence. Selling Bank of America stock around $30/share was a prudent decision back in October 2008, when it cut dividends by 50% to 32 cents/share.

Full Disclosure:

Relevant Articles:

- Dividend Investing Misconceptions
- The Most Successful Dividend Investors of all time
- Reinvest Dividends Selectively
- How long does it take to manage a dividend portfolio?
- Carnival of Personal Finance

4 comments:

  1. Awesome article! I read you quite often and I have to congratulate you for this blog which for people like me, who just are getting started in this world of dividend investing, is quite handy.

    Greetings from Spain.

    ReplyDelete
  2. Just a heads-up DGI. BF-B just announced a $4 per share special dividend. I initiated a position a year or so ago. Sometimes, even though the dividend payout is low, a good company, like this one, pays in other ways too. They also increased their dividend this year by 9%. By my recollection, this is not the first time BF-B has paid a special dividend. Very nice indeed. Happy Holidays DGI!

    ReplyDelete
  3. Very well explained.. People usually think that buy and forget and they fall in pit... Don't buy if you cannot monitor the development of your investment as things change very fast these days and a company business model can go to dust in matter of days.

    ReplyDelete
  4. Your wonderful site is on my daily-to-do list.
    I would like an easy way to create a watch list using only your entry criteria.
    Can you make some suggestions?
    Thank you for your expertise and gentle way of replying to all commenters.

    ReplyDelete

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