Two of the companies I own announced their intentions to hike their dividends. As a dividend growth investor, this is always good news. The companies included:
Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes, other tobacco products, and other nicotine-containing products.
The company raised its quarterly dividend by a paltry 2% to $1.02/share. This was the lowest rate of increase since the spinoff in 2008. It was much lower than the five year dividend growth rate of 12%/year. It was disappointing to many investors. This marked the 7th consecutive annual dividend increases nevertheless. The new yield is close to 5%.
As I mentioned in my analysis of the company however, this should not have been unexpected given the lack of earnings growth in the past few years and the rising dividend payout ratio. While I am bullish on the company for the long-term, I cannot ignore the data that has been showing me that things are not going according to plan. I will keep holding on to this position, because I believe that management will ultimately turn things around. Of course, in the meantime, I will redirect dividends elsewhere.
Friday, September 18, 2015
Thursday, September 17, 2015
Survivorship bias in Dividend Investing - Part 2
This is the second part on suvivorship bias in dividend investing. In part 1, I laid the grounds that investors who put their money to work in dividend growth stocks are not suffering by survivorship bias ( despite the efforts of greedy money managers to portray ordinary investors in a negative light)
I wonder if the same type of logical analysis on survivorship bias is performed by investors who are encouraged to invest in US Equity markets, when they are told how an investment in the S&P 500 or Dow Jones Industrials average would have performed over the past 10, 20, or 50 years. If you consider the event of purchasing shares of Johnson & Johnson (JNJ) due to its history as an example of survivorship bias, then you should not be using historical data on S&P 500 or Dow Jones Industrials average over the past 50 years either in order to prove your point about equity investing. Somehow, this point is lost on so many investors. When discussing long-term returns on equities over the past two centuries, you often hear about the US or UK stock performance. However, you never hear about the performance of a Chinese stock investor or a Russian stock investor from the middle of the 19th century till now. My great-grandfather was born and lived in Eastern Europe more than 100 years ago, saved almost his entire salary working in the coal mines and invested his savings in agricultural land. Unfortunately for him, the communists nationalized his land when they came to power. If he were in the US, he would have died a rich man after decades of compounding. Too bad he weren't.
I wonder if the same type of logical analysis on survivorship bias is performed by investors who are encouraged to invest in US Equity markets, when they are told how an investment in the S&P 500 or Dow Jones Industrials average would have performed over the past 10, 20, or 50 years. If you consider the event of purchasing shares of Johnson & Johnson (JNJ) due to its history as an example of survivorship bias, then you should not be using historical data on S&P 500 or Dow Jones Industrials average over the past 50 years either in order to prove your point about equity investing. Somehow, this point is lost on so many investors. When discussing long-term returns on equities over the past two centuries, you often hear about the US or UK stock performance. However, you never hear about the performance of a Chinese stock investor or a Russian stock investor from the middle of the 19th century till now. My great-grandfather was born and lived in Eastern Europe more than 100 years ago, saved almost his entire salary working in the coal mines and invested his savings in agricultural land. Unfortunately for him, the communists nationalized his land when they came to power. If he were in the US, he would have died a rich man after decades of compounding. Too bad he weren't.
Wednesday, September 16, 2015
Survivorship bias in Dividend Investing
Survivorship bias is the logical error of concentrating on the people or things that "survived" some process and inadvertently overlooking those that did not because of their lack of visibility. This can lead to false conclusions in several different ways.
In this article I am going to discuss two areas which some investors believe are examples of survivorship bias. I believe one of them is an example, while the other is not.
Basically the danger of survivorship bias is that investors make up their mind on what works or doesn’t, using an isolated example, without even bothering to consider any factual evidence. This is dangerous because those investors would then search only for ideas supporting their conclusions, and reject those that do not do so. Therefore, investors might end up missing out on important information, because they only focused on the facts that supported their original ideas in the first place.
For example, I have been reading statements from many investors about how profitable it is to be buying stocks after dividend cuts. Common examples provided are General Electric and Wells Fargo, which would have returned several hundred percent since cutting dividends in 2009. Furthermore, dividends have increased since those cuts, thus resulting in high yields on cost for investors that were smart enough to buy in 2009 (this writer was not that smart to buy at the bottom, though I have my doubts that those who claim to have bought at the bottom are telling the truth (the sole exception that is verified is Warren Buffett and Charlie Munger)).
In this article I am going to discuss two areas which some investors believe are examples of survivorship bias. I believe one of them is an example, while the other is not.
Basically the danger of survivorship bias is that investors make up their mind on what works or doesn’t, using an isolated example, without even bothering to consider any factual evidence. This is dangerous because those investors would then search only for ideas supporting their conclusions, and reject those that do not do so. Therefore, investors might end up missing out on important information, because they only focused on the facts that supported their original ideas in the first place.
For example, I have been reading statements from many investors about how profitable it is to be buying stocks after dividend cuts. Common examples provided are General Electric and Wells Fargo, which would have returned several hundred percent since cutting dividends in 2009. Furthermore, dividends have increased since those cuts, thus resulting in high yields on cost for investors that were smart enough to buy in 2009 (this writer was not that smart to buy at the bottom, though I have my doubts that those who claim to have bought at the bottom are telling the truth (the sole exception that is verified is Warren Buffett and Charlie Munger)).
Monday, September 14, 2015
How I Manage to Monitor So Many Companies
One of the many questions I receive from readers relates to time spent managing my dividend portfolio. The truth is that I have multiple short-cuts, which I utilize to get the right information for me. The other truth is that I try to be efficient with my time.
There are several resources I utilize for doing research.
- My broker
My broker Interactive Brokers is a very helpful tool I utilize. I receive notifications about upcoming dividend payments, which essentially provides a signal when dividends are raised. In addition, I receive notifications of upcoming dividend payments and upcoming quarterly releases on the companies I own. A very helpful tool is the fact that I receive my paper annual reports mailed to me. The months of March through May are characterized by receiving a lot of paper annual reports.
The most helpful thing I learned about monitoring companies, I learned from studying Warren Buffett. The Oracle of Omaha essentially purchased a few shares in many companies, in order to receive their annual reports and significant shareholder correspondence. When you own a small piece of a company, it is much easier to monitor that business. This knowledge will accumulate over time, and would make you ready to act when the right opportunity presents itself.
There are several resources I utilize for doing research.
- My broker
My broker Interactive Brokers is a very helpful tool I utilize. I receive notifications about upcoming dividend payments, which essentially provides a signal when dividends are raised. In addition, I receive notifications of upcoming dividend payments and upcoming quarterly releases on the companies I own. A very helpful tool is the fact that I receive my paper annual reports mailed to me. The months of March through May are characterized by receiving a lot of paper annual reports.
The most helpful thing I learned about monitoring companies, I learned from studying Warren Buffett. The Oracle of Omaha essentially purchased a few shares in many companies, in order to receive their annual reports and significant shareholder correspondence. When you own a small piece of a company, it is much easier to monitor that business. This knowledge will accumulate over time, and would make you ready to act when the right opportunity presents itself.
Thursday, September 10, 2015
Is time spent learning dividend investing worth it? (Part 2)
This is the second and final part on the article from Tuesday. Please refer to the first part that was posted on Tuesday.
I believe that most of the accumulation of knowledge with dividend investing is upfront. This means that the time spent learning about a company such as Johnson & Johnson (JNJ) is in the initial phases of the research process. Time spent updating the story should not take nearly as much time as the time to learn about the company initially, Dividend investing is appealing, because after spending time accumulating knowledge about a company, and building a portfolio of good ones at cheap prices, I am essentially getting paid a growing amount of dividend for decades afterwards, even if I don’t lift my finger after that.
With a passive portfolio of dividend paying stocks, you are going to save a ton on annual management fees. If you bought mutual funds, even low cost index ones, you can end up paying tens or hundreds of thousands of dollars in fees. Even a 0.10% annual fee could be a lot when you manage say $1 million today or $10 million one day. As discussed above, if you use a financial adviser, you would end up paying at least 1% for the "advise" and the high fee mutual funds that go along ( or maybe even pick up some costly annuity) But if you learn how to invest your own money, and devise a plan to accomplish your goals, you will save a ton in costs. If you stick to your plan through thick or thin, you will be able to accomplish your goals. For the do it yourself dividend investor, there are ways to minimize commissions to the minimum, so theoretically it is possible today to buy blue chip stocks for practically no cost and hold them for decades. This is essentially what an index fund on the S&P 500 index fund does. It holds stakes in well-known companies such as Exxon Mobil (XOM), Apple (AAPL), Johnson & Johnson (JNJ), Coca-Cola (KO), but it charges an annual fee for this service. Since those companies are well-known, I have found it easier for me to just buy them outright and avoid paying the annual management fee. The only place where I actively invest through index funds is in my workplace 401 (k) plan. For the majority of workers out there, who confine their investing to their workplace 401 (k) plan, low cost indexing is possibly the best approach due to tax efficiency and employer match. Even then, learning about types of contributions and plans, minimizing fees, investment options available, and asset rollovers, can be tremendously beneficial.
I believe that most of the accumulation of knowledge with dividend investing is upfront. This means that the time spent learning about a company such as Johnson & Johnson (JNJ) is in the initial phases of the research process. Time spent updating the story should not take nearly as much time as the time to learn about the company initially, Dividend investing is appealing, because after spending time accumulating knowledge about a company, and building a portfolio of good ones at cheap prices, I am essentially getting paid a growing amount of dividend for decades afterwards, even if I don’t lift my finger after that.
With a passive portfolio of dividend paying stocks, you are going to save a ton on annual management fees. If you bought mutual funds, even low cost index ones, you can end up paying tens or hundreds of thousands of dollars in fees. Even a 0.10% annual fee could be a lot when you manage say $1 million today or $10 million one day. As discussed above, if you use a financial adviser, you would end up paying at least 1% for the "advise" and the high fee mutual funds that go along ( or maybe even pick up some costly annuity) But if you learn how to invest your own money, and devise a plan to accomplish your goals, you will save a ton in costs. If you stick to your plan through thick or thin, you will be able to accomplish your goals. For the do it yourself dividend investor, there are ways to minimize commissions to the minimum, so theoretically it is possible today to buy blue chip stocks for practically no cost and hold them for decades. This is essentially what an index fund on the S&P 500 index fund does. It holds stakes in well-known companies such as Exxon Mobil (XOM), Apple (AAPL), Johnson & Johnson (JNJ), Coca-Cola (KO), but it charges an annual fee for this service. Since those companies are well-known, I have found it easier for me to just buy them outright and avoid paying the annual management fee. The only place where I actively invest through index funds is in my workplace 401 (k) plan. For the majority of workers out there, who confine their investing to their workplace 401 (k) plan, low cost indexing is possibly the best approach due to tax efficiency and employer match. Even then, learning about types of contributions and plans, minimizing fees, investment options available, and asset rollovers, can be tremendously beneficial.
Subscribe to:
Posts (Atom)
