Wednesday, March 17, 2010

The right time to buy dividend stocks

With the market getting overextended for several months now, and my unwillingness to chase many dividends stocks, it is time to reflect on whether I am doing the right thing or not. Some stocks such as Emerson Electric (EMR) and Realty Income (O) which I was going to add to either in March or in April are trading at valuations that seem richer than what I am willing to pay for at the time.

After writing dividend growth investor blog for over two years now, I have been able to observe investor reaction to my posts. My main source of ideas for improvement has always been with comments which offer some sort of criticism, be it constructive or not. It is understandable however that one cannot please everyone, and as a result I have pretty much kept at my ideas that dividend growth investing is a superior investing strategy for investors at all stages in their life. One of the largest criticisms that I often receive is from investors with a short-term vision in mind. Back in early 2008, the problem for owning US stocks was the weakening of the US dollar and the rise in oil prices. Somehow all commodity rich developing countries which were selling natural resources at inflated prices were being touted as the next big thing. Of course once the bubble collapsed in 2008, many countries such as Russia were hit hard and the lack of diversification in their economies was much evident.

Back in late 2008 and early 2009 most investors were constantly being bombarded with negative stories about the end of buy and hold and the death of dividend investing after a record number of dividend cuts occurred. Of course it is difficult to separate the short-term noise, from the long term story behind the economy or a particular business. The truth is that in order to be successful in investing, one should stick to a certain strategy through thick and thin. Thinking too often could cause investors to deviate from their plans, and suffer from consequences as a result. Famous speculator Jesse Livermore once said that money is made by sitting, not by thinking. It is uncommon to find men who are both right and sit tight as well.

The first few months of the bear market recovery that began in March 2009 were characterized by bears speculating about a double dip recession, nationalization of major banks etc. After a few months of stocks hitting new 52 week high however, the risk of missing out on the rally and having to pay higher prices in the future if money is not deployed now is increasing every day.

Warren Buffett had mentioned in one of his letter sto shareholders that he would rather buy an excellent business at a fair price, rather than purchase a lousy business at a fire sale price. Speaking of the two companies I mentioned above, I have to decide whether they are excellent business trading at rich valuation, or whether they represent average businesses trading at inflated prices.

My strategy for my dividend portfolio is to dollar cost average my way into approximately ten stocks per month, reinvesting dividends selectively and building a diversified portfolio.

The truth of the matter is that if I keep following my strategy, it shouldn’t really matter in the long run whether I purchased Emerson (EMR) at 45 or at 48. This should hold true as long as I do not have more than 3 or 4% allocated to that position and as long as the company is able to generate a sufficient enough earnings growth to power up the dividend hikes into the next decade. Time and again I have noticed how some of the best dividend growth stories ever such as Gillette, Geico, Wal-Mart (WMT) or McDonald’s (MCD) didn’t yield much, yet they had outstanding competitive advantages and solid dividend and earnings growth. Currently Emerson Electric (EMR) and Realty Income (O) offer their lowest yields in many months, which coupled with the low dividend growth as of lately make them a pass until the next dip in prices. However, given the fact that there is seldom any “perfect time” to deploy cash, I would definitely add to those two positions on the next dip.

Full Disclosure: Long EMR, MCD, O and WMT

Relevant Articles:

- Realty Income (O) Dividend Stock Analysis
- Ten Dividend Kings raising dividends for over 50 years
- Buffett the dividend investor
- Should you re-invest your dividends?

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