Wednesday, November 19, 2014

Independent thinking for successful dividend investing

I enjoy dividend investing, because it is always challenging but it is also very rewarding. I have a set level of basic guidelines such as my entry criteria I apply on the list of dividend champions and achievers, in order to identify companies for further research. I then maintain a list of companies that I have analyzed, which I monitor very often for any weakness for a buying opportunity. In addition, I also monitor my existing positions in order to identify any laggards that are either cutting dividends or might not deliver as much as previously expected.

My investment analysis goes beyond reading annual reports and research. I also try to learn as much as possible about the stock market, investing and general business knowledge. In other words, I keep learning as much as possible in order to make myself a better and more rounded investor. Most of things I learn go through my filters, and are rejected as unsuitable for my strategy. Some investment gems are tested and a few are implemented in my tools of the trade. I do eat and breathe investing, and the knowledge I have accumulated in the process has allowed me to develop an independent view on the subject, which works for me. I invest my money based on my own analysis, and end up earning dividends and capital gains, although sometimes I generate capital losses in the process. Surprisingly, I have often found that I am usually right when most other investors are opposed to my ideas.

Sometimes, I also learn from the intelligent comments from my readers. A lot of the times however, I end up interacting with investors who clearly should not be putting their money in anything else than an FDIC insured bank account. Many times these investors are arguing with me, and end up informing me that my view is incorrect. After reviewing their objections, I typically find out that these investors are not performing objective analysis of investment situations either because they are blinded by high current yields or because they are not taking into account some other factors. A third scenario that could sometimes include bits and pieces of the items mentioned earlier is the situation where investors are simply following someone else, without doing their own due diligence.

Back at the end of 2012, I posted an analysis of Abbott Laboratories (ABT), right before the company split into Abbott and Abbvie (ABBV). At the same time I also mentioned that I had recently added to my position in the legacy Abbott Laboratories. While many investors had valid comments about this investment, there was one investor whose main concern was very flawed. If they had mentioned that Abbott was not the wisest decision, stemming from the fact that it was not possible to determine if the two new companies would continue the long streak of dividend increases or that synergies between the two companies would disappear after the split, that could have been a concern worth raising. However, the main argument from the investor with the flawed thinking however was that David van Knapp had recommended selling the stock.

I think that blindly following someone’s advice to be the worst sin of investing. If you follow someone’s ideas to purchase a stock, you are immediately at a disadvantage because you would not be the first one to learn about future investment moves. In fact, if the original “guru” ends up selling their position, without notifying the follower, the follower might end up losing money. In addition, if the “guru” buys a stock, which then promptly falls by 50% or more, as plenty of good quality stock prices did in 2008, an inexperienced investor might get scared, and sell at a loss. You might think that only inexperienced investors do this, but in reality everyone is influenced by authority a little bit. I sometimes find myself influenced by authority figures such as Warren Buffett, and thus justifying certain investments with the mere fact that Buffett has purchased them for Berkshire Hathaway (BRK.B). Following a guru however, is never a good reason to purchase or sell a stock. However, performing an analysis of a stock that a guru purchases, and then determining if it is a buy is perfectly fine.

Back in early 2010, I analyzed Realty Income (O), and found it to be a buy. However, many investors dismissed my analysis, because hedge fund manager Bill Ackman was short the stock. Yet, his thesis was flawed, and contained a lot of holes - and the investment has doubled since then. I held on to my stock during that time period, and added to it. Back in 2013, another investor was short Digital Realty Trust (DLR). I called our his manipulations and held on to my position. Someone on Seeking Alpha objected to my analysis, and their primary argument was that I was not a billionaire. Yet the conviction in my own analysis provided me the strength to hold on to my stock positions. If I had merely followed someone blindly into a stock, I would have bailed out at the first sign of trouble.

Another interesting factor about dividend investing is that some investors simply refuse to do their own independent research. One of the questions I always receive from investors is for the list of my current portfolio holdings. I first posted a snapshot of my portfolio four years ago, but since then the page has been out of date. I have since shared my dividend holdings with subscribers of my mailing list. There is a reason why I don't make this list easily available, unlike other sites dedicated to dividend investing. My thinking is that if I posted my holdings, I would actually be doing a disservice to novice investors. I would much rather have patient readers who review my thought process through my regular postings that describe somewhat recent events, from which they could hopefully learn something. If I posted my portfolio and made it easy for anyone to check it, I would usually risk someone seeing what I owned and then purchased it without giving much thought about it. Unfortunately, my portfolio has been built slowly over a timespan exceeding several years. Just because I found Family Dollar (FDO) to be attractively valued in 2008 and initiated a position at $24.99/share, might not mean that Family Dollar is a buy today at $77 - $78/share.

Full Disclosure: Long O, DLR, FDO, ABBV, ABT

Relevant Articles:

Do not become a victim of fear in your dividend investing
Why most dividend investors never succeed
Should you follow Warren Buffett’s latest moves?
How to monitor your dividend investments
Never Stop Learning and Improving


  1. What if your stock will drop for any reason of 50% How would you behave ? You will just wait for the price to go back while meantime you get dividends, or you will sell and buy at lower price ?

    1. I am not a trader trying to time price moves - this is futile. I ignore price fluctuations. Drops of 40-50% are scary, but if I had done a good job selecting companies for diversified portfolio that are built to last, I should do well over time. If something has changed ( say dividend was cut), I would be out.

      The real problem with stocks is that people are scared of a 50% correction, and end up missing a 1,000% move up. This is not a smart way to behave

    2. Agree. But if you sell and buy the stock back at 50% discount, you could have the same dividend earning and also a gain when the price will back to normal price.
      Anyway I totally agree with you.

  2. Good post and interesting topic!
    I think we are many that have made the mistake of following the lead of a investor that we admire and not being critical enough at one time or another.
    For me personally it's only in recent years that I really have come to realized the importance of of being able to rely 100% on my self and not lean on others. Basically setting my own goals and using my own strategy to achieve them.

    Geting inspiration from others is wrong in it's self (There are some really advice to be had in the blogosphere), but when you are not able to justify our actions without referring to someone else, you are skating on thin ice as we say here in Sweden. I agree with you that if you are entirely dependent on a another person for advice, maybe you shouldn't be buying stocks in the first place.

    /Best Regards
    Long-Term Investment

    1. It's "out on thin ice", no skating in the proverb.

    2. He had it right, it's "skating on thin ice" = risky .. at least that's how we say it in the US.

    3. LTI,

      You are correct that you have to do your own analysis. But to get there, you need to have spent years learning about investing, history, strategies and look at a lot of companies before things start to "click". Otherwise, one is going to go from strategy to strategy, and never making much. Plus, you need to reassess situations and try to be as objective as possible, and think of possible outcomes not black and white scenarios.

      If you buy a stock because someone else bought it, you are doing yourself a disservice. The problem is that there is a lot of bad information about investing not only on the internet, but on TV, books etc. But if you put the time into investing, you increase your odds of success.

    4. You're right, being a private investor takes up allot of time. To be successful I think that it's a imperative that you love what you do.
      It's a journey and I have some traveling left to do before I reach my long-term goal, but as they say - the journey is half the fun!

      /Best Regards

  3. DGI,
    I agree 100%. As you know, sometimes we disagree, but we are both doing our homework which is the main thing. I like to check the ice and make sure that it doesn't crack when I step out on to it. (Yes, Langsiktig investering, we use the same expression in Michigan about skating on thin ice.) I will also get off the ice if I think we are getting a thaw. :)

    Anyway, great article. I see that Warren Buffett is divesting of PG stock. While not necessarily a buy a current prices, it certainly isn't a sell and I am keeping mine. On the other hand, I jumped on the IBM bandwagon recently because it seemed to be a great value. However, one of my college buddies left IBM after 30 years because they don't have any work for him in Michigan. As a matter of fact, his closest choice was Seattle. Since my friend is one of the most intelligent people I know, and very conscientious and hard working, I lost faith in IBM and sold my position (at a small profit, of course). Others may stick with it, and it may do fine long term, but sometimes our personal experience is helpful in evaluating companies.

    Thanks for the well thought out thoughts on personal investing!

    1. Hi Keith,

      You see, most investors who disagreed with me, ended up selling to me their shares at a low price. They also forego the rights to a lifetime of growing dividend payments when they sell to me. So I am actually hoping that everyone starts saying how dumb Dividend Growth Investing is, and how everyone should be investing in Twitter. That way, my capital buys more shares.

      In reality, you should invest your money as you see fit, since you are the one who is affected by the outcome of your investment. But, that statement assumes you actually know what you are doing. I think you do know, but still, it is good to be careful about money you spent lifetime accumulating. And if you happen to sell IBM and buy something else, that's fine with me. But I agree with you that following Buffett or whoever else blindly is probably wrong. (anyone who follows all moves I make could likely do worse than me, since I have a lot of stocks in portfolio bot much lower, which increase intrinsic value but I wont buy now. Despite that, their value will grow and make me wealthy even if I lose 100% on IBM)

      Jokes aside, as an investor I am not going to get all things right. But if on average I do well, I will do fine. The truth is that I need to do my own analysis, and then buy according to it. But I also need to think whether personal experiences are limiting me and whether they are representative of the whole big picture. For example, In 2010 I visited a small town in the US which had a WAG store and it was empty most of the time - almost no customers. I was buying WAG at the time, because I believed the company as a whole could do well with growing DPS and EPS. But if I lived in this small town, and saw noone going to the brand new WAG store, I would have never bought the stock. Hence, I am unsure about IBM - everyone hates it. But the world's best investor likes it a lot and prays for lower prices, bc buybacks will help EPS.( who might still be making a mistake - lets see in 5 -10 yrs) But the company is a solid blue chip that has reinvented itself constantly over time. I personally like ACN better, because I have had interactions with the company, but the valuation has been higher. If it yields 2.50% again, I might add to it. But IBM is a better value today imho.

  4. DGI I Couldn't agree more! Some of my greatest gains in the life of my portfolio have been going against the current. I bought AFL after a 40% drop in August 2011 when the metrics screamed undervalued. I bought WAG in 2012 when for some reason the P/E was trading under 12!

    Finding those unloved stocks (after putting them through my metric screener) has worked out as long as I can hold out for the stock to become popular again.

    1. Hi Evan,

      Having a process to screen for companies is helpful. When you stick to that process you have an edge.

      I was buying AFL in 2009 after it had nosedived by 60%. It then went down by 40%, but now I am sitting at some nice unrealized gains and have been collecting a growing dividend for 5 years!The drops in the summer of 2011 were a great time to be adding to stock positions. This year I was buying TGT, despite what others told me was really dumb. Well, I would much rather be considered dumb and buy quality at a discount that will grow dividends for years, than be smart and lose money in the process.

  5. DGI,
    I also intended to mention that your strategy has proven to be the best for most investors, i.e., buy and hold. From my own experience, the only real mistake I have made is to sell great companies after a market correction and put the money into index funds. Not that index funds are bad, they are adequate, but I sold things like DIS, ABT, PEP, PG, CL, MCD, and MRK. Had I held on and reinvested dividends, I would have ended up doing about six figures better over the last 20 years. I became convinced that I couldn't do better than the "experts" on Wall Street. Pretty dumb, eh? Going forward, I intend to only sell if the fundamentals for a company falter or the valuations get completely insane. Even KO isn't worth owning at 50 times earnings under most circumstances.

    1. Wallstreet uses advertising to tell ordinary investors that they need a professional to manage their money. That is nonsense, because most Wall Street people are really salespeople. You have the same information like everyone else, and if you spend the necessary time to learn the basics, build a diversified portfolio, have a long-term holding period, and buy quality blue chips every month while avoiding overpaying ( and keeping expenses low), the odds are in the individual investors's favor. I actually learned the very hard and costly way that when I sell and I buy something else, I am in most situations worse off. I would have been much better off simply not doing anything. Being lazy and not doing much can make you a really good investor. Being active, can make you a terrible investor. In my job, I will get fired for being lazy - as an investor I think thats the best recipe for my money.

  6. How do you measure your investing success? You seem to have a well defined investment approach that you follow with discipline ... and I admire this, After following a similar approach to yours for a number of years, I am now trying to determine how "successful" I have been as an investor. I am leaning towards using a combination of two factors:
    1. Dividend growth achieved ("same store" basis) versus what a passive investment approach would have provided me.
    2. Total portfolio return versus a passive approach.

    How do you measure your success?


  7. Hi P,

    I measure success relative to my goals, not relative to some benchmark. My goal is to earn enough dividend income over time that exceeds expenses.

    Check this article out:

    I also look at whether my group of stocks produces organic dividend growth:
    While I have done in the past, I do not believe that comparing my total return to S&P 500 adds value for achieving my goals.

    Best Regards,



Questions or comments? You can reach out to me at my website address name at gmail dot com.

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