Thursday, June 8, 2017

The Four Hour Dividend Investment Plan

If you are like most readers on this site, chances are you have a decent job, which allows you to have a certain lifestyle and to save money to invest. You are also likely to have other obligations including family, fixing the house or the car, plus a few other activities scattered around your schedule. It is very likely that you are starved on time. You are interested in dividend investing, but probably are hesitating to start it, because you do not believe you have the time to do all the work involved in it.

Well, there are a few solutions for you, if you want to go the self directed investor route. I would show you how you can be a dividend investor by spending less than four hours per week.

In order to achieve that, you need to be very efficient with your time. You need shortcuts to get the information you need, in order to make decisions. You would have to rely on the work and information presented by others, and should be ok with it. You should be ok that this information might include material omissions, some inaccuracies or might include an element of bias. Many believe that the best scenario for any investor is to immerse him/herself in the company they are studying by reading annual reports, industry publications, and try to get experience with the products/services offered. However, this takes time that you do not have, which is why the shortcuts are the way to go for you. Studies have shown that having too much information may actually lead to poor decision making. There is also point of diminishing returns when it comes to company information. In other words, it is unlikely that spending 100 hours studying the ins and outs of a particular security will result in better decision making over a couple of hours of research on the company for the average investor. (from the framework of having a diversified portfolio of course)

I believe that creating a simple, repeatable process could be the solution to the problem for the time starved investor.

The first step in the process would be to obtain the list of dividend champions from the website of David Fish. I have reviewed the dividend champions before, and believe that list to be the most exhaustive list of US dividend growth stocks available. The list by Dave Fish is miles ahead of the dividend aristocrats list that Standard & Poor’s created.

After you get all the stock symbols from the dividend champions’ list, you should create a portfolio in Yahoo! Finance or in another program that allows you to display up-to-date information on those securities of your liking. This would include metrics such as the price to earnings ratio, dividend payout ratio, earnings per share and dividend per share.

Once you have gone through the initial set-up phase mentioned before, you are ready to screen the portfolio list identified in step 2. You would export the portfolio list with P/E ratios, dividend payouts and earnings and dividends in Excel, and add things like 5 or 10 year historical dividend growth rate. You would screen based on criteria you have set up for yourself that make sense. You can view the screen criteria I use from this article. The screen should be run one or two times every month. The frequency of running the screen will largely be dependent on the availability of investable funds each month. You can see the results of the last screen, that identified 30 Dividend Champions for further research.

Based on the screen you performed, you would have a list of companies for further research. You would need to look at things like ten year trends in earnings per share, dividend payout ratios, returns on equity and dividends per share to name a few. You can start by using data from Morningstar or Gurufocus to find the information look at trends. However, annual reports should be the preferred place if you had time, as data feeds might have inaccurate information. If you are starved on time however, this may not be an option for you. You can also use forward analyst earnings projections using Yahoo Finance. However you should use them with caution, because Wall Street analysts are notoriously overoptimistic.

Another helpful resource for investors who are starved on time includes daily reading of websites such as the Dividend Growth Investor. I try to analyze individual companies and create a summary that supports my decision to buy or not to buy. It is not an exhaustive list of everything, but it gets the job done. You can also check out analyst reports on individual companies from S&P, which most brokers like Schwab, Etrade, Merrill Edge provide to clients free of charge. If you find some time, I would strongly encourage you to go through company annual reports, press releases and presentations. If you are ever stuck for an hour or two at the friendly DMV office nearby, passing the time with a handy annual report beats almost anything else.

After you have gathered information on the companies you are following, you need to decide which companies you will buy with your limited amounts of capital. Depending on how stringent your rules are, you will probably find a decent number of quality companies available at good prices every month. You would have to compare the characteristics of each company you own, and determine which ones will get your scarce resources based on your individual constraints.

For example, you might only afford to put $1000/month in one position. However, for the past 12 months most of your investments have been in one sector, because they were the cheapest ones with the best growth prospects ahead. Let's assume that you see a company from another sector that is more expensive than the most expensive company from the first sector that you can find. In this case it may make sense to buy the company from the second sector, if you can see it grow in the future. The reason for choosing the company from over the cheaper company is because you are overly concentrated in one sector. This is a huge risk, because your entire fortunes are dependent on the fortunes of the energy companies of today. You do not want to lose all your money in a concentrated bet, because that would set your investment plan back by several years. The investors who bet heavily on financial stocks before the financial crisis of 2007 – 2009 lost on dividend income and suffered heavy impairments in their capital base as well. If you lose a lot of money, you would be less likely to invest in the stock market again. At least most people who invest in stocks have behaved that way.

As a result, your goal should be to own shares in at least 50 – 60 quality dividend growth companies. After a decade of investing in companies, you will likely reach 100 companies very easily. Avoid the urge to trim the number of positions you hold, for the sake of trimming the number of positions in a portfolio. Your portfolio should have companies from as many sectors of the economy that make sense at the time you put your hard-earned money to work. This won’t happen overnight, and you would build this portfolio slowly over time. For example, many of the overvalued consumer staples like Colgate-Palmolive (CL) and Automated Data Processing (ADP) were attractively priced for several years after the 2008 – 2009 stock market meltdown. A wise investor would have purchased a lot of them at the time. A smart investor would have also continued purchasing in the several years after that, as long as valuations were not overstretched.

You should also monitor the investments you have made, although I can bet that this can be done once every 12 – 18 months. Assuming you are purchasing mature dividend stalwarts, there is not much change over the course of one to five years. Chances are also that your spouse or children are not very interested in investing. Therefore, you should strive to create a portfolio of quality blue chip dividend stocks that can be self-sustained for several decades after you pass.

The thing is that good companies take care of themselves, while the mediocre ones will provide most of your headaches. If you hold on to your portfolio and do little if any “re-balancing”, you should do well, because the few winners you are going to get will bail you out in the long-run. This would compensate for a few losers that fail eventually, and for the ones in the middle, which just chug along in a slow but steady fashion.

In fact, I have found that too much research can sometimes cause the investor to make too many bad decisions. I have found that too much turnover leads to mistakes. I have seen plenty of times when good companies fall temporarily on hard times, causing fickle investors to sell out at the bottom. On the other hand, some companies do fall on hard times that they never get out of. However, it is impossible to determine in advance whether the company is experiencing are temporary or permanent. Therefore, the best course of action is to do nothing. This may sound like heresy to many dividend investors out there, but if you simply build a diversified dividend portfolio, and do nothing about monitoring and do no selling no matter what, you may come out ahead. This stage is more for those who are no longer adding much money every month to their dividend portfolios. However, even those in the accumulation stage can learn a thing or two about patience, and not bailing out at the first sign of trouble.

Until then, you can monitor your existing investments by going through the process of evaluating companies in the first place during your buy phase. This includes historical trends in data and also reading analyst reports. Eventually, as you get more time, I strongly encourage you to start obtaining your company information from the source, which are annual and quarterly reports. And no, checking the stock quotes on your portfolio does not constitute monitoring your investments. In addition, once you learn about a company, the basic foundation of knowledge stays with you forever. If you understood McDonald's (MCD) in 2007, you know the company pretty well in 2016. That’s how knowledge works. It builds up, like compound interest.

As for dividends you receive, you should reinvest them selectively, unless you are living off the income generated by your portfolio. Otherwise, you should go through the same process for reinvesting dividends that you go through when you add new capital. The only difference is that depending on the size of your portfolio, it might take a varying amount of time, until you accumulate enough to purchase say $1000 worth of shares.

In the meantime, avoid the urge to react to news, pundits, or feelings of fear or greed. Remember that your investments should be evaluated over a period of decades, not months or quarters. Micromanaging your investments will likely lead to subpar results.

In this article I have outlined a few simple guidelines for building and maintain a diversified dividend portfolio. Readers are encouraged to modify and use any of those guidelines to their own preference. However, I also encourage readers to keep learning more about their investments over time. Ultimately, the investor's chief enemy is themselves. If you learn as much as possible about your investments, and your investment strategy, you are less likely to bail out when the going gets tough.

Relevant Articles:

How to become a successful dividend investor
Are you patient enough to become a successful dividend investor?
Five Dividend Growth Investing Lessons I Have Learned Over the Years
Does Market Capitalization Matter in dividend investing?

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