Wednesday, November 6, 2013

Dividend Investors Should Ignore Market Fluctuations

As a dividend growth investor, my goal is to generate a rising stream of sustainable dividend income, through careful investment in quality dividend growth stocks.

My investing plan is not dependent on market fluctuations. In fact, even if they closed the market tomorrow, I would not care. That is because most my stocks would keep sending me quarterly dividend checks (some do monthly and a few do it annually), with the only issue being that I won’t be able to reinvest distributions into more shares. I am sure I would be able to buy shares directly from other investors however, thus side-stepping the "official stock market". As a result, my dividend income goals are not dependent on the stock price fluctuations.

I simply focus on quality dividend stocks, which I try to purchase them at attractive valuations. I try to focus on companies which have raised distributions for at least ten consecutive years, and which have the capacity to boost distributions over time. I am a firm believer that a management team which focuses on consistently sharing a portion of the profits with investors in the form of dividends will continue doing so, as long as the business is able to support that.

At the end of the day, if you had the chance to purchase a growing quality company like Johnson & Johnson (JNJ) 25 or 30 years ago for example, you would have been exposed to plenty of stock price volatility. You would have witnessed the 1987 stock market crash, the oil shock in 1990 - 1991, as well as the dotcom bubble and the credit bubble implosions. At the same time, earnings per share for Johnson & Johnson increased from 30 cents/share in 1987 to a projected $5.48/share by 2013. The annual dividend is $2.64/share, up from 10 cents/share in 1987. The point of this exercise is to show that you should be focusing on the underlying business strengths, not on stock price fluctuations.

The table below shows that there has been plenty of fluctuations in Johnson & Johnson stock price over the past 30 years.

Of course, a dividend portfolio is not a set it and forget it type of deal. Investors need to monitor the financial health of their stocks regularly. In a previous article I mentioned that once a detailed analysis of a dividend stock is compiled, then any future analyses should not take a lot of time. After all, companies do not fundamentally change every year. Notable exceptions of course include mergers and acquisitions, spin-offs etc.

Market fluctuations should not scare the intelligent dividend investor, but could be used to his/her advantage. A steep drop in prices in quality dividend stocks like Johnson & Johnson or Coca-Cola, like the one witnessed during the 1987 market crash would have provided an excellent entry point for long-term wealth accumulation.

One of the best investors, Warren Buffett is famous for saying :

 ‘‘After we buy a stock, consequently, we would not be distrurbed if markets closed for a year or two. We don’t need a daily quote on our 100 percent position in See’s or H.H. Brown to validate our well being. Why, then, should we need a quote on our 7 percent interest in Coke (KO)?’’

Dividend investors should also treat investing in quality income stocks as more of a long-term partnership with the business, than stock market speculation. To summarize, dividend investing is as close to Buffett’s long-term investing strategy as possible.

Full Disclosure: Long JNJ, KO

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