Friday, September 26, 2008

“The Top 40 Dividend Stocks for 2008 – How and Why to Build a Cash Machine of Dividend Stocks”, Book Review

This article originally appeared on The DIV-Net September 19, 2008.

Recently I received an interesting book on dividend investing, titled “The top 40 Dividend Stocks for 2008 – how and why to build a cash machine of Dividend Stocks”, written by David P. Van Knapp. The author, who also maintains the site, decided to skip the publishers altogether and has his book available to readers online in a PDF format. That made it easier for him to provide an up to date edition in order for his readers to stay competitive in the markets.

The book is very well written and is organized in 8 chapters, starting with an overview of dividend stocks in general, characteristics of the best dividend stocks, creating and managing a dividend portfolio and ending with the system that the author has created which has helped him identify the top 40 dividend stocks that he recommends. This book should be appealing not only to novice dividend investors but also to more seasoned stock pickers with its wealth of information on dividends. Almost everything you ever wanted to know about dividends could be found in it.

The author starts the book by giving an introduction of what dividends are and why investors should buy stocks which produce increasing streams of dividend income. He also discusses the pros and cons of dividends versus share buybacks, and proves that it pays to own the “boring” dividend stocks which provide the most efficient stream of income from a tax perspective right now. I especially enjoyed reading about his discussion on managing portfolios consisting of the best dividend stocks. I also liked his ideas on portfolio management where he set clear goals and objectives as well as strategies for achieving them. I also found the idea of avoiding to catch falling knives, and instead wait for the stock price to turn before accumulating shares particularly intriguing.

Another section focused on certain types of companies which are organized specifically to pay high dividends such as business development companies, real estate investment trusts as well as master limited partnerships.

Many investment services will sell you a cheap book which describes a system which is pre-sold throughout the book. Not this one – this author sells a buy one get one free type of deal as he not only shares his stock picking system but also provides specific picks as well as the reasoning behind selecting those picks. The last half of the book was specifically dedicated to analyzing the top 40 dividend stocks for 2008 in more detail, thirteen of which were non-US companies.

There were several items that the author might have to provide some clarity to readers in future editions of the book. A mention that unless the current tax code is extended beyond 2010, the tax rate on dividend income for the highest income brackets would be much more than 15%, would have been informative.

I also think that future editions of the book should mention something about holding dividend stocks in a tax-deferred account such as an IRA, ROTH IRA or a 401k. Most investors who are in the accumulations stage would be better off in the long run without having to pay taxes on their annual dividend income.

I enjoyed his writings on the BDC, REITS and MLP’s. I believe however that most investors overlook these vehicles because the distributions from the three types of firms are taxed somewhat differently compared to distributions from common stocks. I would have also enjoyed reading more about taxation on MLP’s from his own experience. Most other yield hungry investors would probably enjoy a small section on Canadian Income Trusts as well as tanker stocks such as NAT, FRO, DSX.

I personally disagree with him that dividend payout ratios are not important in individual stocks selection. In fact avoiding stocks with unreasonable payouts has prevented me from purchasing any stocks that were caught in the most recent financial turmoil, which had to cut their dividends in order to conserve cash.

Last but not least, despite the fact that Mr. Van Knapp shared the top 40 picks from his system, it seemed to me that his initial list of around 700 dividend paying stocks needed more clarification about the methodology in compiling it. Don’t get me wrong – the top 40 dividend paying stocks in his book are representative of what every dividend growth investors looks for. I wonder however if he compiled his initial list of stocks from other sources whether he would have arrived with different stock picks in the end.

Overall I enjoyed reading the book, and would recommend it to any serious dividend investor who wants to succeed in his or her endeavors. It is easy to read, well organized and provides a wealth of information not only for the novice investor but also for the seasoned pro!

This article originally appeared on TheDiv-Net.

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