Friday, April 26, 2013

Dividend Growth: Freedom Through Passive Income Book Review

Several months ago, Mike from Dividend Guy Blog sent me his book and asked me for a review. I did not receive any compensation for this review, other than a free copy of the US version of his dividend investing book. As a somewhat moderately read site, I do from time to time receive books for review. The first review I have done was on the book from Derek Foster, Stop Working.

Overall I believe that this book would be useful for investors who already have some background on the basics of dividend investing. As I read through it, I kept notes of things that I liked about, as opportunities for improvement. The book is called Dividend Growth: Freedom Through Passive Income US Edition. The book is also available for Kindle.

I liked that he shared his screening method for identifying dividend paying companies for further research. I was impressed that his screening method also looked for increases in revenues and net income, and not just dividends.

I also liked his discussion on how tricky calculating the dividend payout ratio is. The price to earnings ratio was another ratio whose calculation is tricky. The formulas themselves are not difficult to implement, but what makes it tricky is whether one uses trailing, forward or normalized earnings and dividends. The book stresses that investors need to make sure to double check every detail about companies researched before you invest. The book also stresses that it is important to invest for the long term, and that investors should ignore negative headlines completely.

There were a few typos, which made it confusing to me as a reader at times. A better editing would have been extremely helpful to get his points across.

The one thing I had never seen before however is the visualization of stock characteristics using quadrants. Mike uses quadrants to visualize dividend yield and dividend payout ratios. This visual method makes it pretty easy to spot good opportunities that could be screened through the next quadrants. He also runs his stock picks through other quadrants, where he looks at five year net income growth and P/E ratios as well as dividend yield versus dividend growth for companies being researched. Few dividend analysts ever focus on earnings growth, which is the fuel behind dividend growth, and therefore one of the most important ingredients behind future dividend increases. Overall I found an interesting new method to visually show information to make my point in presenting dividend ideas.

Mike also stresses on the importance of building diversified dividend portfolios. He focuses on sector diversification, geographic diversification. If you want to build a dividend machine that would regularly distribute money to pay for your retirement, implementing diversification is a very important tool to use.
The author is a financial advisor and a self-confessed active trader in his previous investing strategies. This is fine, but one can definitely notice that with his references to the CAPM, moving averages, selling a stock that went up 30%, and stock betas.  However, I have found that active traders who become dividend investors tend to have valuable insights on investor psychology. One trait that I have is that I tend to have an itchy finger whenever I have cash in the brokerage account. I rush to buy, especially since there are so many opportunities I do not want to miss.

The author also discusses reading quarterly reports in order to make certain that the company is still performing according to expectations. The book then discusses how companies which do not meet the investment criteria anymore should be sold. While dividend investors should keep up with important material information affecting their holdings, it is debatable whether they should act on temporary noise that quarterly results represent. I do agree however with the premise that investors should monitor stocks and sell the ones whose long-term prospects are not bright anymore. I also disagree on the fact that dividend investors should use stop losses. Your dividend portfolio is not an actively traded portfolio, but a long-term income producing one. A stop loss would have led to realizing losses in quality companies like Johnson & Johnson (JNJ) and Procter & Gamble (PG) during the 2008 – 2009 financial crisis, despite the fact that these companies managed to increase profits and dividends during this tumultuous period.

I did find the overview of Canadian income stocks to be helpful, since most Canadian dividend paying stocks tend to pay a stable and growing distribution over time. The book also mentioned that US based income investors need to be aware of withholding taxes in taxable accounts. I also found the review of Real Estate Investment Trusts to be very descriptive and useful as well. It discussed the positive, negatives, tax implications, FFO etc. The Fin Viz screening method is not very useful when it comes to REITs however, which is why a reference to the dividend champions list would have been very helpful. I would encourage Mike however to add a primer on Master Limited Partnerships in his next edition of his book.

The last portion of the book discusses different stages of investing depending on level of experience and amount of funds at hand. The book recommends that investors with less than a certain amount of money should focus on dividend ETF’s to keep costs low and be diversified while they are getting a grip on dividend investing. Once this threshold is increased however, investors should focus on purchasing individual dividend paying stocks.

The biggest plus of this book is that it offers what other similar books offer, at a much lower price. The book sells for $14.99. You could also find the book on Kindle: Dividend Growth: Freedom Through Passive Income. It could be helpful tool to use because it includes several important aspects of dividend investing available in one resource. Overall I believe that this book will appeal to investors who have at least some background on dividend investing.

Full Disclosure: Long JNJ, PG,

Relevant Articles:

Diversified Dividend Portfolios – Don’t forget about quality
Buy and Hold means Buy and Monitor
Best Canadian Dividend Stocks
Five Things to Look For in a Real Estate Investment Trusts
Master Limited Partnerships (MLPs) – an island of opportunity for dividend investors
Book Review: Stop Working

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