Many investors I know follow different investment principles, such as that to "Buy low, sell high" and "Buy and hold forever". To many investors, purchasing dividend paying stocks at 52 weeks highs or all-time-highs seems like anathema, since it would run contrary to their beliefs of buying low.
I expect businesses I own to keep expanding, selling more products, generating higher revenues and earnings, while showering me with more cash dividends each year. In the meantime, those rising earnings and dividend make businesses more valuable over time, as they increase their intrinsic value. Therefore, in a somewhat efficient marketplace for securities, I expect stock prices of successful businesses to follow and keep hitting all-time-highs over time. Of course, I do not focus on stock prices as much, as I do on values. I have found that focusing too much on meaningless short-term stock price fluctuations is not helpful to my long-term wealth building. This is because I feel the urge to do something, which is dangerous to the compounding of wealth. As a long-term investor, the goal is to set-up a portfolio, and look at annual reports, and quarterly press releases as well as major announcements such as dividend increase, mergers & acquisitions to name a few. I focus on valuation today, compare valuations between different companies between industries, and make estimates of future growth based on sustainability of business model ( does the company have any moat).
Many of the quality businesses I focus on here tend to increase intrinsic value over time. As a result, waiting for the perfect price might let you sitting in the dust. This doesn’t mean to throw all caution out the window and buy regardless of valuation, and without requesting some margin of safety in the event that future is not as rosy as expected. However, if you find a company that sells at an all-time high and say 19 – 20 times earnings, you might have to start accumulating shares if you believe there are good prospects down the road. If earnings per share double in seven years, and the P/E compressed to 15 – 16, the stock could still end up much more expensive in 7 years. If you add in the missed compounding from reinvested dividends, the opportunity cost of sitting in cash might be pretty high.
If you think about it, the all-time high of Coca-Cola from 1987 is much lower than the range it sells for today. In fact, if you purchased Coca-Cola at 52 week highs as long as it sold below 20 times earnings throughout history, you would have done pretty well for yourself. It is true that it is much better to buy quality dividend growth stocks at the lowest prices possible. If you have a long-term horizon like me, that spans at least 15 – 20 years from now, you can afford to view one or two year periods as mere noise.
To me, it is more important to focus my attention on the best values at the moment, and then analyze them for future growth. If the best value today sells at an all-time-high, I would not be worried. I actually read a study, which found that actually purchasing companies that hit all-time-highs has resulted in above-average gains to investors. I know that this was more of a timing strategy than buy and hold, but the results are nevertheless very interesting. The more experience I gain, the more I realize that getting the right entry price is important. However, it is much more important to identify a quality earnings and dividend grower, which manages to earn more money over time, and thus making the business more valuable. If the company has the type of business that sells a unique product, has strong pricing power, and has great earnings growth visibility, then it is fine to pay 20 times earnings for it. This is the type of situation that Warren Buffett describes in his famous saying " It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
My dividend growth strategy is essentially a strategy of following long-term trends in company fundamentals, specifically their dividend rates. Essentially, once I purchase shares in a company, I hold on for as long as the company raises dividends. Even if a company stops growing dividends, I will keep holding on to it, but allocate them elsewhere. It is important to reinvest dividends selectively, into the best values and qualities found at the moment, and not mindlessly reinvest into the same company regardless of valuation. If valuations become too overstretched however, such as in situations where future growth expectations do not justify a P/E of 40, it might make sense to dispose of the security. The situation where I typically have done most of my selling is after a dividend cut. I have found in analyzing my investments that selling a mildly overvalued company to purchase a mildly undervalued is mostly a mistake. If I identify a mistake in the original thinking I may have done, that led me to an investment in the first place, I would sell as well.
On the other side of the equation, just because a company is cheap, and is selling at a 52 week low does not mean it is an automatic buy. Investors who only focus on stock prices, without understanding anything about the business, growth prospects, are probably speculating.
To summarize, just because a company is selling at a 52 weeks high, does not mean that it should not be considered or it should be sold automatically. A new investor should evaluate the value by looking at business fundamentals, catalysts for future earnings growth, and valuation before committing their hard-earned money to work. For those who already hold shares in a company which is hitting a 52 week or an all-time-high, they should continue monitoring their investment, and check whether earnings are growing and that there are catalysts for further growth. One of the hardest things for investors to do is to just hold on to their best ideas, as they prove them right, and not sell and buy something that appears cheaper but leaves the investor worse off in the long-run.
Full Disclosure: Long KO and BRK.B
- Dividend Cuts - the worst nightmare for dividend investors
- Why would I not sell dividend stocks even after a 1000% gain?
- How to read my stock analysis reports
- Three Characteristics of Successful Dividend Investors
- Reinvest Dividends Selectively
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