Friday, August 19, 2016

Holding Through the Good Times

This guest post was written by Joe Ferris, who is a long-time reader of the site. The author now manages money professionally and creates individualized dividend portfolios for individuals, families, and institutions. He charges less than most mutual funds and more than most indexes. He has over 60 happy clients and is based in California. Californian readers may contact him at if they are interested in inquiring about his portfolio management business

I am a long time reader of this blog. DGI has helped me solidify a solid investment strategy over the many years of my reading his blog, and I have enjoyed our personal correspondence over the last 6-7 years or so. Recently, in the course of our correspondence DGI asked me if I would want to write a guest blog, and I happily agreed. His posts on university endowments primarily using their interest and dividends, and not dipping into their principal, changed my way of thinking about investing and the capital markets

One day in 2010, I read this particular article, which analyzed V.F Corporation (VFC) . It made a lot of sense to me, and after further research, I decided it would be appropriate to initiate a position. I did so, buying VF Corporation at a split adjusted cost of $20.85 per share in January of 2011.

Well-known value investor Li Lu described during a presentation how he sometimes scrutinizes a company's management, even investigating the owner of an apparel company at his synagogue and asking around about his character. This was in reference to Timberland, then run by Jeffrey Swartz, a descendant of the founder. Lu was impressed with both management and the company. Apparently, VF Corporation was too, because in June of 2011 they acquired Timberland. After this acquisition, the market saw good potential in VF Corporation future earnings, and the share price went up.

At first, I was pleasantly surprised by the incidental raise in share price of a high quality company that would pay me dividends. But after almost doubling my money within the next couple of years, the capital gain did not appear so incidental any more! Like Gollum with the One Ring, I started imagining how much I could improve my dividend income if I only sold my VF Corporation for a long term capital gain and reinvested into other companies that were higher yielding at the time.

I ran it by others and wrote about it, obsessing about what I should do. While I obsessed, the share price went ever higher. Ultimately, I decided to keep the stock. My strategy required a diverse amount of companies in different sectors in order to give me a differentiated source of income streams. "Reductio ad absurdum", if I were to sell all of my capital gainers to reinvest into higher yielding stocks, I would be left with only a few higher yielding stocks. Ultimately, the stock at one point quadrupled in value, and now fell to a little bit over triple what I paid for it. Meanwhile, my VF Corporation (VFC) dividend income appreciated 18.63% per year since my purchase. I see continued strong dividend income as they expand internationally.

I see this struggle now, in some investors. Some have experienced large capital gains with their stocks in many different sectors, including in capital intensive companies which have debt that now requires lower cost of capital due to low interest rates and bond yields. Others have experienced run-ups due to the popularity of dividend growth investing in this low interest rate environment, where many blue chips yields are competitive compared to the ten year treasury bond, typical fare for the income of a retiree in the past. I would caution selling some of these companies, especially ones with management that you trust to navigate through the next business cycle. Sacrificing the golden goose might be momentarily satisfying, but finding something else that has a high quality yield like it could prove challenging indeed in the current environment of high asset prices across the board.

It is very hard to predict the irrationality of the market, and therefore my strategy is to keep accumulating fairly valued or undervalued stocks for a good reason, and rarely, if ever, sell them. Radical diversification should help insulate my portfolio from dramatic income loss in case of a company specific kerfuffle, and avoiding the temptation to sell during the boom times will help keep high quality earnings streams in my dividend income.

Full Disclosure: DGI is long VFC. I have not received any compensation for this post. 

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