Tuesday, September 3, 2013

Why do I keep talking about the same companies all the time?

Dividend investing is so boring, it makes watching paint dry up look very exciting in comparison. You get to identify a few great quality companies, and then continuously try to purchase them at attractive valuations.

Unfortunately, some of my readers are unhappy with the fact that I keep writing about the same stocks over and over. The point is that once I tell you how great Coca-Cola (KO) or Wal-Mart (WMT) or Exxon-Mobil (XOM) are, it seems that there isn't really much more to learn.

I think these readers might have a valid point that I do tend to write about a select few companies in some of the articles discussing strategy. I can understand how this could sound boring.

However, on the strategy articles I write, I use ideas like Wal-Mart (WMT), McDonald's  (MCD) etc, merely as an illustration of a principle. It is true that I can use a company like Lowe's (LOW), Automatic Data Processing (ADP) or Brown-Forman (BF/B), but then some readers would be unhappy because these stocks are really expensive today.

The problem is that there are only so many dividend stocks that are both 1) cheap to buy from a valuation perspective and 2) something I would consider quality companies.

My starting point is usually the list of dividend champions and dividend contenders, that Dave Fish so graciously updates every month. For example, out of thousands of stocks traded on NYSE, Nasdaq and AMEX, only 105 have managed to boost dividends for over 25 years in a row. While I do focus on companies with long histories of consecutive dividend increases, I do not find all of them investable from my point of view. Every dividend growth investor has their own nuance to the strategy of course, but as a rule I tend to avoid companies I do not understand very well. For example, I am not very good at predicting whether Microsoft (MSFT) or Intel (INTC) have the same durable competitive advantages like Coca-Cola for example. I cannot foresee how disruptive changes in technology could result in changes in the way users consume computing resources. However, I can reasonably expect that people would still use the refreshment of one of the 500 drink brands that Coca-Cola sells worldwide. If you understand Microsoft or Intel better than I do however, then this is your edge and you should be sticking to it.

I believe readers like to both hear about quality companies, but also want to hear about them when I think they are priced attractively. If I think Wal-Mart (WMT) is cheap today, I would keep writing about it. If Procter & Gamble (PG) is fully valued, I might not write about it. With the current bull market, oil (Chevron (CVX) and, ConocoPhillips (COP)) and some retailers ( Wal-Mart (WMT), and Target (TGT)) are the ones I have been eyeing on. This is why I keep writing about them over and over.

The thing to consider is that different quality dividend stocks are available for sale at different times. For a period of 2008 – 2012, the companies like Johnson & Johnson, Procter & Gamble, Kimberly-Clark (KMB) and Colgate-Palmolive (CL) were attractively valued. This is why I kept using them as examples to illustrate my points in in my articles on dividend investing. Once they stopped being attractively valued per my understanding, I stopped writing about them, except as an opportunity to vent about their overvaluations.

On the other hand, I do post a weekly stock analysis almost every Friday, where I do try to feature a different company. I have found however that the majority of readers are mostly interested in hearing about the Johnson & Johnson and Coca-Cola of the world. Unfortunately, very few readers are interested in little known companies such as Dr. Pepper Snapple Group (DPS), Casey's General Stores (CASY) or Ameriprise Financial (AMP) for example.

At the end of the day, dividend investors should focus on the types of companies they understand, and then keep buying them when they are attractively valued. Dividend investing is a slow and steady process, as it takes years of meticulous monthly contributions, before you build a decent income base that allows you to retire. If you specialize in the right types of quality companies, you understand how they make money and you expect them to keep churning higher profits and dividends, then I do not see a reason to keep looking elsewhere just for the sake of looking elsewhere.

Full Disclosure: Long WMT, TGT, DPS, CASY, AMP, JNJ, KO, PG, CL, KMB,

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12 comments:

  1. Here's some homework worth doing if you find the time. It would be interesting to know if and how the profitability of the companies in our universe (i.e. mostly the ones you are writing about) will be affected once interest rates are rising. A company with (currently) relatively high debt (PM, for instance) will likely be more affected by higher rates than one with little or no debt. Perhaps you can run some numbers on the usual suspects from AFL to WMT to see how higher rates might play out. How profitable would PG be now, for instance, if rates were at 2, 3, or 4 per cent? Knowing how higher rates would affect a company's profitability may help judge their ability of paying, or raising, their dividends, once the going gets tougher. Perhaps one could even look at how those companies fared, profitability-wise, in the past when rates were high. You might enjoy looking into this a little. Alas, I haven't got the time now.
    All the best,
    Florian

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  2. I think the biggest point is not talking about the same (good) companies over and over again.

    The problem is that your selection is biased. The real goal should not be to find companies that ARE already successful but those which are going to be successful in the future.

    I wonder if you had recommended PG, JNJ or MCD already in the early 90s or even 80s ;)

    Thats the real challenge: To use your knowledge to discover upcoming (and currently undervalued) dividend champions.

    ReplyDelete
  3. Hey DGI,

    I also feel that I'm repeating myself from time to time on my blog too! I guess we all have our list of favorite stocks that meet our entry critera. Then, it's hard to discuss about stocks we wouldn't buy or that are too expensive right now!

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  4. I am interested in smaller companies that are likely to beat the S&P 500 over time. I'd like to see you analyze their stocks.

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  5. "Unfortunately, very few readers are interested in little known companies such as Dr. Pepper Snapple Group (DPS), Casey's General Stores (CASY) or Ameriprise Financial (AMP) for example."

    DGI, I bet you're wrong on this. I would be willing to bet that well over half of your readership looks *precisely* for ideas such as these, because "everyone" knows about Coke, Pepsi, Walmart, and Exxon. Like you say/imply, there are only so many ways you can skin a cat, and if someone doesn't understand why Coke is a solid brand, perhaps they shouldn't be investing...

    I would encourage you to continue to explore ideas such as DPS, CASY, and AMP.

    Thanks as always,
    Sev

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  6. Your blog is neither dull or too repetitive. On the contrary, some repetition is prudent. It's better to invest in the tried and true than the new and exciting.

    Keep up the good work! Interesting to read, as always.

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  7. I am greatly interested in up and coming, undervalued companies.

    I have distinct split within my portfolio, so I am acquiring both sides of the dividend growth spectrum.

    As well as more stable utilities, consumer staples, and defensive stocks.

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  8. DGI, I love your blog. It is my favorite out of various similar blogs. Maybe some of the hard to please readers should read Jeremy Siegel's book "The Future For Investors: Why the Tried and True Triumph over the Bold and the New".

    I happen to enjoy the "concepts" you share that are sprinkled about with some good examples people can wrap their head around (even if the examples are the "old boring tried and true" companies). Over the last 50+ years, it was the old boring dogs (slow growers often with headwinds) that beat the younger growth companies if the measuring stick was "total returns" over the long term. Jeremy Siegel goes into great depth in his book to explain the reasons why. There are a lot of other blogs out there for the people who prefer the high growth companies that are good for society, jobs, the overall local or world economy, etc, but not necessarily the best for long term total returns that are valued by value investors.

    If you change and/or add anything in regards to your blog, I would only suggest changes only if you believe the new or additional information fits within the framework of your purpose for your blog.

    People call Warren Buffett boring too.

    Keep up the good work DGI!

    ReplyDelete
  9. DGI your blog has always been a great resource. It doesn't matter if the companies discussed are tiny or the big well known (aka boring) companies.

    I imagine David Fish had a similar issue which is why he includes 'challengers' and 'contenders' on his dividend champions spreadsheet. This was his way of highlighting up and coming dividend champs.

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  10. I THINK YOU WILL FIND THAT SOME PEOPLE JUST DON'T GET IT AND PROBABLY NEVER WILL.
    GOOD JOB. KEEP ON WITH WHAT YOU ARE DOING. I HAVE BEEN DOING IT FOR 50 YEARS AND RETIRED IN 1987!
    BEST REGARDS, WOODY (I REALLY ENJOY YOUR LETTERS)

    ReplyDelete
  11. DGI, you are doing exactly what you should be doing...teaching! You taught me why I should invest in certain stocks and helped me to learn to evaluate them. When I was looking at investing in a convenience store type stock, I looked at your blog one day and saw CASY. Exactly what I was looking for, exactly. After doing my homework, I bought it, before you announced that you had done so. I'm a dividend growth investor, and I hope you keep reinforcing the same ideas as always. Don't change what has made you popular with us all.

    A

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  12. Often the best ideas can be the simplest most obvious ones, and the best investments the ones that you already own.

    Looking around for small companies or up and comers that are solidly profitable, rapidly growing and pay a dividend to boot is something that is extremely tough. For most folks, sticking with larger companies that pay dividends can bring in consistent predictable long term returns.

    ReplyDelete

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