tag:blogger.com,1999:blog-3584696203336871201.post7447927306387287441..comments2021-05-16T06:08:44.788-07:00Comments on Dividend Growth Investor: Dividend Growth Stocks Increase Intrinsic Value Over TimeDhttp://www.blogger.com/profile/11197290990687067072noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-3584696203336871201.post-3237131548826475602015-04-21T19:37:47.631-07:002015-04-21T19:37:47.631-07:00Salvatore,
Thank you for reading and leaving a ve...Salvatore,<br /><br />Thank you for reading and leaving a very thoughtful comment. Thoughtful comments always make me happy, since I get to connect to smart readers in the process of interacting. <br /><br />1) It is very important to stick to a strategy for a long period of time. Sticking to a strategy when it produces great results is easy; actually having the conviction to stick to a strategy when it is temporarily in the doldrums is what separates investors who make money from those who don’t make money. Investors who frequently switch strategies never do as well as they should. As you have noticed, modeling/simulation is extremely difficult, because the real world does not conform to linear patterns of behavior. However, I believe it is “easier” to estimate dividend income given a certain conservative estimate for dividend growth and yield and a certain rate of investments per month, than to estimate the value of that portfolio. By “easy” I mean that the estimate is more likely to be closer to the actuals because dividends are more stable and reliable than capital gains. <br /><br />2) Over the long run a company that grow earnings, can grow dividends, and its share price should rise. However, share prices are also dependent on valuations. This is where using a model breaks down – a company with earnings doing the right thing could get overbid by investors to sky-high P/E ratios if it is “fashionable” or it could be avoided by investors even at single digit P/E ratios if it is viewed as “doomed”. When you buy at a cheap valuation, your dividends accelerate your return due to reinvestment at low values. If you reinvest at a high valuation, your dividends increase returns but not by much. In reality, a company that grows only because valuation multiple expands is likely subject to too much speculation. What happens if everyone loses their rose-colored glasses, and the share price contracts? In 1999 – 2000, investors had overbid indexes like the S&P 500 to something like 30 – 35 times earnings. As a result, despite growth in revenues, earnings and dividends, the total return was close to zero for the next 12 years or so. Those who sold off index shares following the 4% rule to live in retirement likely “spent” half of their assets and could run out of money if markets do not increase by 8-10%/year every year.<br /><br />You might like this article: http://www.dividendgrowthinvestor.com/2015/02/buying-quality-companies-at-reasonable.html<br />Dividend Growth Investorhttp://www.dividendgrowthinvestor.com/noreply@blogger.comtag:blogger.com,1999:blog-3584696203336871201.post-42458663808671785602015-04-21T10:55:01.485-07:002015-04-21T10:55:01.485-07:00DGI,
This post highlights two very important poin...DGI,<br /><br />This post highlights two very important points for me:<br />1) I recently undertook an analysis to try and figure a "portfolio value" that will get me to my dividend crossover point. The fact is, a portfolio value is not a good surrogate for dividend income, because stock prices can be volatile and a lot will happen between the "beginning" of the investing journey and that point. What's more important is lock-step growth (unless a company has a small payout ratio and is looking to distribute more to its shareholders) in three semi-independent factors: share price, EPS, and dividend per share. The metrics that we commonly use are ratios of these factors (yield, payout ratio, P/E ratio). An imbalance of growth the growth rate between these factors leads to trouble (over inflated price, too much EPS w/ not enough being returned to shareholders, or unsustainable dividend growth). As a result of this, I've found it very hard to model exactly how much I will need to contribute over the years to reach my dividend crossover point. But, while I can't know what exactly I will need to have invested to reach that point, I see how important sticking to the strategy is (as per your JNJ example above) in order to have a chance of succeeding at it. I wager that the ideal scenario is, in the long term, having securities that grow (at a rate greater than inflation) the share price, EPS and dividend annually at a roughly equal pace. Well, more ideal would be EPS and dividends growing with no share price appreciation, but that is not likely to happen:)<br />2) Blindly re-investing dividend proceeds is probably not the smartest general practice unless you know that EPS, share price, and the dividend are all growing at about the same rate. I know you know this already. However, I had to use some modeling to convince myself of the impact. Assume you had a100 shares in a security that was $40 per share, had $1 dividend annually (for simplicity), and $2 EPS. That gives you a P/E of 20, payout ratio of 50% and a yield of 2.5%. If all of those metrics increased at 5% annually, and you reinvested at the the "appreciated" share price, your dividend payment at 10 years would be $206.10. And, at year 10 your P/E, payout ratio, and yield are still the same. If the share price increases by 10% annually, but EPS and dividend increase at 5% only, your dividend payment at 10 years would be $195.85. And, at year 10 your P/E ratio would be 31.85, payout ratio would still be 50% and your yield would have dropped to 1.57%. Now, you might say, "but now the value of your portfolio is $12,669 with the share price appreciation, vs $8450 without the appreciation...so how does a loss of only $11 dollars per year in dividends matter when you now have ~$4200 more than you would in that other scenario?" That's because that extra capital is subjected to the swings of the market. If the share price in this security dropped to $71 per share (~28% drop...NOT unheard of), the portfolio values are the same. And that capital advantage has been wiped away. You now rely on your ability to time the market very well, which many argue, is unlikely for sustained periods of time. <br /><br />Anyway, this article put some things in perspective for me, so I thought I would share - STICK TO THE STRATEGY!<br /><br />SalSalvatorenoreply@blogger.comtag:blogger.com,1999:blog-3584696203336871201.post-22951710294421350102015-04-21T08:43:32.641-07:002015-04-21T08:43:32.641-07:00Hi Keith,
Please check this article on why I do w...Hi Keith,<br /><br />Please check this article on why I do what I do:<br /><br />http://www.dividendgrowthinvestor.com/2014/03/why-do-i-use-pe-below-20-for-valuation.html<br /><br />Best Regards,<br /><br />Dividend Growth InvestorDividend Growth Investorhttp://www.dividendgrowthinvestor.com/noreply@blogger.comtag:blogger.com,1999:blog-3584696203336871201.post-72911329396680403682015-04-21T08:30:13.945-07:002015-04-21T08:30:13.945-07:00DGI,
Some others use a different norm, if you will...DGI,<br />Some others use a different norm, if you will, for the price-to-earning ratio. Fastgraphs, for example, uses a P/E of 15 for most stocks. I know that the low interest rate environment makes a higher P/E normal, at least while interest rates are low. So, my question is this: do you adjust your upper P/E limit as interest rates move up and down? I seem to remember you using a P/E of 15 in the past.<br />Thanks,<br />KeithXKeithXhttps://www.blogger.com/profile/02811016563226771174noreply@blogger.com