Thursday, February 4, 2010

Dividend Investors are getting paid for waiting

Many investors believe that successful dividend investing consists of identifying the highest yielding stocks in the market and then generating double digit returns on investment each year. The problem with this strategy it that it often overlooks the fact that such dividend yields are most often unsustainable in the long run. A much better strategy that could eventually produce double digit yield on cost to investors is dividend growth investing. Using this strategy a patient investor accumulates a diversified portfolio of stocks which have a long history of consistently growing dividends. The positive factor is that any investor can implement this strategy, especially now that brokerage commissions are almost zero.

Dividend investors are paid for holding common stocks, which is one reason why a company which keeps paying a stable or rising dividend does not fall as much during bear market declines. The dividend returns are always positive, which provides a safety cushion even in the worst times possible. Furthermore dividends cannot be faked, whereas earnings could be massaged within certain limits in order to reach performance targets that are not economically prudent.
This return can be reinvested which further magnifies long-term income growth as well as total returns. Companies that raise dividends also provide a tangible proof that companies do have the cashflows to pay them. A company which does not have a solid business model typically cannot afford to raise dividends for more than a few years.

Paying dividends also imposes a discipline upon companies, which restricts excessive empire building or "diworsification" through overpriced acquisitions. Opponents of dividend investing often claim that dividend stocks are boring and slow moving, and instead recommend purchasing fast growing rising stars, which reinvest everything back in their business. While re-investing back into the business is a good idea, expanding too rapidly might lead to excessive leverage build up with disastrous consequences for the owners of the business. Any solid company should be able to balance its capital investment needs with its shareholders demands for returns on their investment. Successful companies such as McDonald’s (MCD) and Wal-Mart (WMT) have not only grown their business in a smart way, but have also rewarded shareholders consistently as well.

Currently, the market is a little overextended off of its March lows. Many investors are wondering whether they should cash out or keep adding to their positions. Dividend investors on the other hand have the luxury to ignore market movements as long as distributions are intact and growing. After all solid companies with definite competitive advantages which throw off rising dividend payments each year do not lose their moats overnight. Such companies include Johnson & Johnson (JNJ), Procter and Gamble (PG), Chevron Corporation (CVX), Pepsi Co (PEP) and McDonald’s (MCD).

The Procter & Gamble Company (PG), together with its subsidiaries, provides branded consumer goods products worldwide. The company operates in three global business units (GBU): Beauty, Health and Well-Being, and Household Care. Procter & Gamble is a dividend aristocrat as well as a component of the S&P 500 index. One of its most prominent investors includes the legendary Warren Buffett. Procter & Gamble has been increasing its dividends for the past 53 consecutive years. (analysis)

McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants in the food service industry worldwide. The company's share of the US fast food market is several times larger than its closest competitors, Burger King (BKC) and Wendy's (WEN). McDonald’s is a major component of the S&P 500 and Dow Industrials indexes. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 33 consecutive years. (analysis)

PepsiCo, Inc. (PEP) manufactures, markets, and sells various snacks, carbonated and non-carbonated beverages, and foods worldwide. PepsiCo is a major component of the S&P 500, Dow Industrials and the Dividend Aristocrats Indexes. PepsiCo has been consistently increasing its dividends for 37 consecutive years. (analysis)

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. Johnson & Johnson is a major component of the S&P 500, Dow Industrials and the Dividend Aristocrats Indexes. One of the company’s largest shareholders includes Warren Buffett. JNJ has been consistently increasing its dividends for 47 consecutive years. (analysis)

Chevron Corporation (CVX) operates as an integrated energy company worldwide. Chevron Corporation is a component of the S&P 500 and Dow Jones Industrials Indexes. The company is also a dividend achiever, which has been consistently increasing its dividends for 21 consecutive years. (analysis)

Full disclosure: Long CVX, JNJ, MCD, PEP and PG

Relevant Articles:

- Chevron Corporation (CVX) Dividend Stock Analysis

- Procter & Gamble (PG) Dividend Stock Analysis

- Dividend Investing vs Trading

- The Sweet Spot of Dividend Investing

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