Wednesday, November 6, 2013

Dividend Investors Should Ignore Market Fluctuations

As a dividend growth investor, my goal is to generate a rising stream of sustainable dividend income, through careful investment in quality dividend growth stocks.

My investing plan is not dependent on market fluctuations. In fact, even if they closed the market tomorrow, I would not care. That is because most my stocks would keep sending me quarterly dividend checks (some do monthly and a few do it annually), with the only issue being that I won’t be able to reinvest distributions into more shares. I am sure I would be able to buy shares directly from other investors however, thus side-stepping the "official stock market". As a result, my dividend income goals are not dependent on the stock price fluctuations.

I simply focus on quality dividend stocks, which I try to purchase them at attractive valuations. I try to focus on companies which have raised distributions for at least ten consecutive years, and which have the capacity to boost distributions over time. I am a firm believer that a management team which focuses on consistently sharing a portion of the profits with investors in the form of dividends will continue doing so, as long as the business is able to support that.

At the end of the day, if you had the chance to purchase a growing quality company like Johnson & Johnson (JNJ) 25 or 30 years ago for example, you would have been exposed to plenty of stock price volatility. You would have witnessed the 1987 stock market crash, the oil shock in 1990 - 1991, as well as the dotcom bubble and the credit bubble implosions. At the same time, earnings per share for Johnson & Johnson increased from 30 cents/share in 1987 to a projected $5.48/share by 2013. The annual dividend is $2.64/share, up from 10 cents/share in 1987. The point of this exercise is to show that you should be focusing on the underlying business strengths, not on stock price fluctuations.

The table below shows that there has been plenty of fluctuations in Johnson & Johnson stock price over the past 30 years.


Of course, a dividend portfolio is not a set it and forget it type of deal. Investors need to monitor the financial health of their stocks regularly. In a previous article I mentioned that once a detailed analysis of a dividend stock is compiled, then any future analyses should not take a lot of time. After all, companies do not fundamentally change every year. Notable exceptions of course include mergers and acquisitions, spin-offs etc.

Market fluctuations should not scare the intelligent dividend investor, but could be used to his/her advantage. A steep drop in prices in quality dividend stocks like Johnson & Johnson or Coca-Cola, like the one witnessed during the 1987 market crash would have provided an excellent entry point for long-term wealth accumulation.

One of the best investors, Warren Buffett is famous for saying :

 ‘‘After we buy a stock, consequently, we would not be distrurbed if markets closed for a year or two. We don’t need a daily quote on our 100 percent position in See’s or H.H. Brown to validate our well being. Why, then, should we need a quote on our 7 percent interest in Coke (KO)?’’

Dividend investors should also treat investing in quality income stocks as more of a long-term partnership with the business, than stock market speculation. To summarize, dividend investing is as close to Buffett’s long-term investing strategy as possible.

Full Disclosure: Long JNJ, KO

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6 comments:

  1. DGI,

    I am always surprised at the dividend growth of these blue chip companies like JNJ when looking at historical data. To think that the dividend was only $.10 back then, compared to where it is now, is incredible. To then think of the people who traded out of JNJ in 1987 to make a quick buck, or sold during the crash. That was a great time to buy.

    -RBD

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  2. I totally agree with this sendiment...but it really is so hard to do. I am actively building a portforlio of sotcks that will pay me seady income, and to a large extent I can ignore the momentary fluctuations, even though my own experience has taught me to just stick with it.

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  3. All due respect to Buffett, but he's not a simple buy and hold value investor. He pretty much runs a multi strategy hedge fund. He does private equity, loans money, buys derivatives, on top of the value and quality strategies. To think of him as a simple investor is wrong IMO.

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  4. Where did you get the historical data from? I've only seen ycharts, but they charge to look at anything older than 5 years.

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  5. RBD,

    I concur ;-) It is very important to pick a quality company (one that will be there in 10 -15 years) at attractive prices and then just do nothing for a few decades. That is very hard however..

    Aaron,

    I think when Buffett says the things he says, he refers to the 99% of ordinary investors. Most ordinary dividend investors should pick 30 - 40 stocks and then do nothing for the rest of their lives. Buffett is a genius, and he has been able to make money in shorting, options, currencies, derivatives, using leverage. But he spends 70 hours a week working on his craft, and has been doing that for 50 - 60 years.

    In my strategies, I pick and choose the things that make sense to me. I have profiled Buffett many times on this site, so you might want to check the archives for more information.

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  6. Kyle,

    This is my own file, that I have accumulated over the years. Services like Ycharts or anything else have a lot of limitations, missing or erroneous data etc. That is why maintaining your own data file is the best option for the serious dividend investor.

    If there is ever any interest, I might share my master file with readers ( but probably for a small fee)

    ReplyDelete

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