Comments on Dividend Growth Investor: When to break your rules

Thanks for informing on your smart tips on when to...

2010-02-04T21:05:34.229-08:00

Thanks for informing on your smart tips on when to break one's rules.

You're right, of course. It's easy, in hi...

2009-12-13T04:56:29.793-08:00

You're right, of course. It's easy, in hindsight, to highlight stocks like WMT and MCD, but they are truly the exceptions that prove the rule. Far more companies would have been failed investments.

Finding "future exceptions" like a WMT will probably require additional filters--a blending of growth and value criteria, along with a strong, judgmental conviction about the story underlying the stock.

It's an intresting quest. I'm sure, somewhere, others have gone back and tried to model WMT and MCD and applied their findings to stock selection. Guru investing might be a place to start.

Good luck and keeping breaking your rules!

Dividends value is good site on investing. DV and ...

2009-12-12T16:50:27.996-08:00

Dividends value is good site on investing. DV and I are one of the founders of the dividend and value investing network.

The reason why I wrote that I might consider lowering yield criteria is exactly because WMT in the 1980's yielded less than 1%. The dividend growth was high however. In hindsight buying WMT in 1980s would have been a great investment. Of course you also have to consider all the companies that had similar characteristics to Wal Mart in 1980's which are either bankrupt today or have stopped paying distributions. Kmart and Winn-Dixie are some examples of former dividend growth stars which have crashed and burned after losing their dividend streak status...

Dj, I think that requiring at least 10 years wort...

2009-12-12T16:47:09.068-08:00

Dj,

I think that requiring at least 10 years worth of dividend increases would be a good screen to weed out companies which have simply been "lucky" in raising distributions. Many companies started paying out dividends in 2003 and raising them because of the favorable dividend tax. If this tax expires, these companies might decide to stop raising dividends.
Also some companies which have flat earnings but low dividend payouts could raise dividends for many years until dividend payout ratio is unsustainable.
You also want to avoid getting whipsawed into cyclical stories which are about to burst.

dividendsvalue.com, which advocates a strategy sim...

2009-12-11T04:53:14.123-08:00

dividendsvalue.com, which advocates a strategy similar to yours, has a post up which compartmentalizes companies neatly into three groupings of yield and growth. It's worth a read.

Consider analyzing a potential dividend growth inv...

2009-12-10T19:23:00.064-08:00

Consider analyzing a potential dividend growth investment in terms of its potential "Yield on Cost" (YOC) at various future dates.

Case 1: Stock A is currently yielding 4%, but has grown its dividend by 7% a year for the past ten or more years. If you believe this dividend growth rate will continue for the next ten years, the dividend will double in ten years. Ten years from now, in other words, your YOC will be 8%.

Example: You buy $10K of stock A and it yields 4%, or $400, in year 0. Ten years from now, the dividend has doubled to $800, which is an 8% YOC.

Case 2: Stock B is currently yielding 2%, but has grown its dividend by 14% a year for the past ten or more years. If you believe this dividend growth rate will continue for the next ten years, the dividend will double in five years and then double again at the ten-year point. Five years from now, your YOC will be 4% and ten years from now, your YOC will be 8%.

Example: You buy $10K of stock B and it yields 2%, or $200, in year 0. Five years from now, the dividend will have doubled to $400, which is a 4% YOC. Ten years from now, the dividend will have doubled again to $800, which is an 8% YOC.

Ten years from now, both stocks will be yielding the same annual dividend payment ($800), which is the same yield (8%) on the original cost of $10K.

Upside: If you believe these dividend growth rates will continue beyond ten years, stock B will continue to yield a higher YOC because its dividend growth rate is higher than stock A's dividend growth rate.

Downside: The higher the dividend growth rate, the greater the chance it might slow down in future years because higher dividend growth rates are harder to sustain. But if a business is exceptional (i.e., great MOAT, well managed, great opportunities to expand), it might be able to sustain a high dividend growth rate for a long time.

You're smart to broaden your search for divide...

2009-12-10T10:05:37.719-08:00

You're smart to broaden your search for dividend growth.
What I'd give to own 100 shares of MCD from the first time my father took us to McDonald's for 15 cent burgers!

To the previous poster's point, I'd encourage you to look for smaller cap growers that are already paying dividends. It's the only way you'll identify the next Wal-Mart or McDonald's, and I think you'll find the joy of discovery as satisfying as continually plumbing the depths of the dividend aristocrats.

(And if you'll accept some advice from an old-timer, don't tell yourself that you're relaxing your criteria or you'll revert back to your current criteria with your first mis-step. Invent a new strategic approach like dividend asset allocation or something similarly positive. Massage it and take pride that you're pioneering a new concept.)

Keep up the fine work.

I was wondering how you might feel about bending y...

2009-12-09T19:50:38.316-08:00

I was wondering how you might feel about bending your ten year rule of consecutive dividend increases by using the same pairing method that you are using with Wal-Mart and AT&T. In that arrangement the pairing is based on balancing out WMT's low, fast growing yield with T's higher, slow growing yield.

It seems the same type of pairing could be based on years of consecutive dividend increases instead of yield. Stocks that are close to or have the potential to become dividend achievers such as COP, KFT, RTN, YUM, GIS, INTC, MSFT could be paired with the longest paying dividend aristocrats PG, JNJ, KO, EMR, MMM. Or is the ten year rule one you would not consider breaking? This probably would not be a great strategy for those closer to retirement. However, for those with a longer time horizon would it be worth trying to find these stocks a little early?

Also I'd be curious to dig a little deeper into your thoughts on Wal-Mart circa 1984. If such a stock existed today would you consider it speculative to invest in such a low priced, low yielding stock. Or was Wal-Mart exhibiting some characteristic(s) that would have been identifiable to dividend investors in 1984? If so would it be worth putting a small amount of money in a few stocks that exhibit similar characteristics to Wal-Mart in 1984, or is there too much risk trying to project such outsized dividend growth like Wal-Mart and McDonald’s so early in the process.

Kudos on the Original Dividend Aristocrats and the Dividend Grouping posts. Very insightful. I have also really enjoyed your posts that focus on value investing (what I struggle with most in the market these days) so I hope you'll keep writing more of these. Thanks.