The beauty of dividend investing is that once an investor purchases a quality income stock, they can hold on to it for many decades, while patiently collecting cash dividends. The success of a dividend growth investor depends not only on picking the best companies in the world, but also purchasing them at the right price and holding on to them for as long as possible. With the market close to all-time highs, many dividend investors are complaining that it is difficult to find attractively valued stocks to purchase.
I have found that entry price matters when selecting companies. If you pay a cheap price for stocks, you essentially lock in a higher current yield. In this situation, your margin of safety is higher as well. The advice is usually to buy stocks when there is blood on the streets. In recent memory, the best times to acquire quality stocks on sale was during market crashes such as the ones witnessed in 2001-2002 as well as the most recent one from 2007- 2009. The truth however is that few people have large hoards of cash sitting on the sidelines, patiently waiting to be deployed only at fire-sale prices.
In reality, as an investor in the accumulation phase I have a few obstacles that a retired investor does not have too much of. I get fresh cash contributions every month that needs to be invested. If I chose to wait for perfect opportunities, the risk I am facing is that I might miss out if stocks get even more expensive afterwards. Nobody can say if dividend stocks will rise by 50% or fall by 50% over the next year. No one can even forecast within a reasonable amount of certainty if they are even going up or down. If the market goes up from here, the money in cash represents a lost opportunity.
If stock prices go down, I would buy at lower prices and earn more dividend income. However, I have found that market timing is something that cannot be consistently done by ordinary investors. If I buy now and stock prices tank, I will have more opportunities to buy at attractive prices later on. Even if the stocks I own go down in value, as long as fundamentals are sound and earnings and dividends keep growing, I should be fine eventually. During the financial crisis, shares of Johnson & Johnson (JNJ) fell from a high of $72.76 in September 2008 to a low of $46.25 by March 2009. At the quarterly dividend of 46 cents/share, the differences in dividend yield were between 3.98% in March 2009 and 2.53% in September 2008. I kept holding on to my position, and adding to it as fundamentals were sound, and the dividend was about to be increased in April 2009.
In a study on dollar cost averaging, I found it pays to invest as soon as possible. Over time, companies get more valuable as they service more customers, make more profits and sell new products and expand in new markets. It is great to avoid stocks that are very overvalued, but truth is, there are attractive opportunities even in today’s market. If you invest funds in attractive companies with bright prospects and strong competitive advantages, you are improving your odds of success.
While entry price is important, it is not the only determinant of investment success. A consistently growing company can eventually “bail out” its patient investors, even if they overpaid for it. As earnings and dividends increase, the P/E compression would render the shares more valuable. This, coupled with a higher yield and the prospects for higher dividends down the road, would increase the value of these shares. Maintaining a diversified portfolio that does not use leverage is another important factor to consider. If you are overleveraged, you can still lose your income stream as well as your nest egg during a market meltdown.
As a result, it pays to invest in recession proof stocks, which offer a product or service that customers need no matter what cycle the economy is in. A few such companies, trading at reasonable valuations today
Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus, provides supplemental health and life insurance products. This dividend champion has managed to boost dividends for 30 years in a row, and over the past decade has managed to boost them by 19.30%/year. Currently, the stock is trading at 9.10 times earnings and yields 2.50%. Check my analysis of Aflac.
Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide.This dividend champion has managed to boost dividends for 26 years in a row, and over the past decade has managed to boost them by 9.60%/year. Currently, the stock is trading at 9.10 times earnings and yields 3.30%. Check my analysis of Chevron.
Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products.The company has managed to boost dividends every year since becoming independent from parent Altria (MO) in 2008. The five year dividend growth rate is 13.10%/annum. Currently, the stock is trading at 17.70 times earnings and yields 3.70%. Check my analysis of Philip Morris International.
Full Disclosure: Lon AFL, CVX, PM, MO, APD
- Buy and hold dividend investing is not dead
- Does entry price matter to dividend investors?
- Opportunity Costs for Dividend Investors
- Dividend Investors are Getting Paid for Holding Dividend Paying Stocks
- Market Declines: An Opportunity to Acquire Quality Dividend Stocks