Here Is A Pretty Good Brief In Favor Of Dividend Growth Investing

[haha]

Asset Allocation For A Dividend Growth Investor - Seeking Alpha

Written by a retired man who has been doing this for some time, it tries to marry asset allocation choices to a rational covering of income needs.

A personal note- I have never run my retirement portfolio on the liquidation method that is embedded in most "asset drawdown" or controlled liquidation models. Growing cash distributions are best for me.

Ha

[modhatter]

Glad you brought this post up again. I was reading an older one the other day and was wanting to comment. Mathjack was arguing that he didn't feel a dividend slanted stock was superior to just selling a portion (that portion that is given in dividend) and it is a wash. His other argument was that you can not look at dividends as a reliable income source.

While I do agree with #2 to a certain point, I also think there is an added safety margin in dividend stocks when you are in retirement (draw down phase) If we are in a prolonged sideways market, then draw down is killing you slowly (unless you have sufficient other income funds to draw from) without drawing down your stock portfolio. If the market tanks again and values plumet, dividend rate goes up in accordance with value of stock, and as long as dividend is not cut (which historically has not for the most part) then you still have income to live on from dividends without having to sell your stock or bond positions, or at least have to sell only minimal amount to make up for any dividend cuts.

The plus in my mind for not being tied to dividend stocks is the exposure to more stocks with potentially more upside, but once you enter into draw down phase, the dividend approach seems a more cautious method.

If my $1,000,000 sinks down to $500,000, my dividends will not change that much. But if my $1,000,000 sinks to $500,000 and we enter a 10 yr. flat line, and I have to draw down, I'm in big trouble.

I know many people say that the bond funds even out the drops in the stock funds, and they do to a degree. But in the last severe downturn they took a hit as well. Only difference they recovered nicely now, but I still would have hated to sell either then.

[ziggy29]

I like dividend investing in general, but I also feel like the current War on Savers is causing a desperate "search for yield" which is bidding up the price of dividend stocks.

[haha]

Quote:

Originally Posted by ziggy29 I like dividend investing in general, but I also feel like the current War on Savers is causing a desperate "search for yield" which is bidding up the price of dividend stocks.

That may be true of extreme high yielders, but there are many high quality companies paying 3+%, covering that very well, and growing it annually.

No strategy is perfect, including this one. But IMO Mathjak was wrong to characterize dividend income as insecure. With good companies, it is much more secure than what most of us relied one while working.

Most financial companies are less secure. They pay good dividends, and grow them well as they have modext capital needs. But given their inherent leverage, things can go bad fast, as they did in the late, great, downturn.

Rental property is likely better, if you don't mind the physical work.

Ha

[misanman]

This is exactly the approach that I am taking but my plan hasn't reached the level of maturity reflected in the article. This article was very helpful. Thanks for posting.

I was looking at my retirement fund growth over the last 4.5 years. It's amounted to 25% in total but I was surprised to see that 60% of the growth was from dividends and (bond) interest, whereas 40% was from stock appreciation.

[FIREd]

Quote:

Originally Posted by ziggy29 I like dividend investing in general, but I also feel like the current War on Savers is causing a desperate "search for yield" which is bidding up the price of dividend stocks.

Is that really the case? I can't see it myself. Dividend stocks as a whole are not cheap and some are even really expensive, it's true, but they don't seem to be excessively more expensive than the rest of the market as this point.
Let's compare the P/E of several Vanguard funds:

Vanguard's dividend growth fund P/E=14
Vanguard's high dividend yield index fund P/E=13.2
Vanguard's 500 index fund P/E=14.2.

Since the beginning of the year, dividend paying stocks have actually underperformed compared to the rest of the market.

[jimnjana]

Quote:

Originally Posted by FIREd Is that really the case? I can't see it myself. Dividend stocks as a whole are not cheap and some are even really expensive, it's true, but they don't seem to be excessively more expensive than the rest of the market as this point. Let's compare the P/E of several Vanguard funds: Vanguard's dividend growth fund P/E=14 Vanguard's high dividend yield fund P/E=13.2 Vanguard's 500 index fund P/E=14.2. Since the beginning of the year, dividend paying stocks have actually underperformed compared to the rest of the market.

I think the electric utilities are one sector of dividend paying stocks that are getting expensive when measured by PE. Industry Avg PE 15.6 (Yahoo) That is one reason why utilities are trailing the market so far this year.

[ziggy29]

Quote:

Originally Posted by FIREd ILet's compare the P/E of several Vanguard funds: Vanguard's dividend growth fund P/E=14 Vanguard's high dividend yield index fund P/E=13.2 Vanguard's 500 index fund P/E=14.2.

Dividend stocks historically trade at a considerably greater discount than this, the idea being that they tend to be large and mature, and have less expected growth than the average stock on the exchange.

[FIREd]

Quote:

Originally Posted by ziggy29 Dividend stocks historically trade at a considerably greater discount than this, the idea being that they tend to be large and mature, and have less expected growth than the average stock on the exchange.

I thought the comparison was fair since the Vanguard 500 index fund is itself dominated by large, mature companies.

[redduck]

Quote:

Originally Posted by FIREd Since the beginning of the year, dividend paying stocks have actually underperformed compared to the rest of the market.

Since the beginning of the year? Is that just about five weeks?

[FIREd]

Quote:

Originally Posted by redduck Since the beginning of the year? Is that just about five weeks?

I am sure you can count as well as I can.

[grumpy]

With regard to my dividend stocks I have always tried to follow the adage: "buy what others are selling, sell what others are buying". I have been buying what I felt were cheap, high dividend payers for the last 20 years. I am now selling a portion of my positions in those that have run up the most. This includes some utilities.

[grasshopper]

But boy, 2011 returns are sweet.

[CyclingInvestor]

Expensive ? I find many bargains available, and only a few that are 'bubbling' at all. Here are many of my favorite stocks, with current P/Es vs the last 17 years -

Current Historical PE
----- PE - 10 09 08 07 06 05 04 03 02 01 00 99 98 97 96 95 94

ABT - 11 - 11 14 15 18 16 15 19 21 21 32 27 20 30 21 18 17 15
ADP - 20 - 19 18 17 22 27 26 27 24 23 37 46 45 39 34 26 25 23
EMR - 15 - 19 17 14 20 18 19 21 23 20 23 28 18 20 20 19 17 15
ITW - 14 - 16 16 12 17 15 16 19 22 20 24 21 23 21 24 19 17 15
JNJ - 13 - 13 14 13 15 17 17 20 20 24 30 30 31 33 28 22 22 16
KO - 17 - 18 17 15 22 19 18 20 27 26 29 44 54 56 44 35 29 24
MDT - 12 - 11 14 11 18 20 23 22 24 26 34 47 33 38 31 24 23 13
MMM - 14 - 15 16 12 17 16 18 20 25 22 28 29 22 18 22 22 20 18
MSFT - 11 - 12 16 11 22 19 20 23 25 26 35 24 67 46 29 27 21 21
PG - 16 - 17 16 17 22 21 22 22 22 23 23 25 37 32 31 24 21 18
SYY - 15 - 15 15 13 19 24 23 26 27 25 26 34 30 25 24 20 22 19
WMT - 13 - 14 15 17 16 15 17 21 24 26 36 37 54 38 22 16 18 18

I find it extremely easy to remain invested in these stocks at current valuations.

[haha]

Quote:

Originally Posted by CyclingInvestor Expensive ? I find many bargains available, and only a few that are 'bubbling' at all.

This is also how I see it. Many equate dividend investing with trying to find the highest yielding stocks, while to me it consists in finding quality companies which have a good record of annual dividend increases, and a high enough dividend going in to sustain one's budget.

I am usually happy with going in yields of 2.x %, though I will often wait a while or choose something else to get close to 3%. I also buy some low yielding or no yield stocks.

Ha

[FIREd]

Quote:

Originally Posted by CyclingInvestor Expensive ? I find many bargains available, and only a few that are 'bubbling' at all. Here are many of my favorite stocks, with current P/Es vs the last 17 years - Current Historical PE ----- PE - 10 09 08 07 06 05 04 03 02 01 00 99 98 97 96 95 94 ABT - 11 - 11 14 15 18 16 15 19 21 21 32 27 20 30 21 18 17 15 ADP - 20 - 19 18 17 22 27 26 27 24 23 37 46 45 39 34 26 25 23 EMR - 15 - 19 17 14 20 18 19 21 23 20 23 28 18 20 20 19 17 15 ITW - 14 - 16 16 12 17 15 16 19 22 20 24 21 23 21 24 19 17 15 JNJ - 13 - 13 14 13 15 17 17 20 20 24 30 30 31 33 28 22 22 16 KO - 17 - 18 17 15 22 19 18 20 27 26 29 44 54 56 44 35 29 24 MDT - 12 - 11 14 11 18 20 23 22 24 26 34 47 33 38 31 24 23 13 MMM - 14 - 15 16 12 17 16 18 20 25 22 28 29 22 18 22 22 20 18 MSFT - 11 - 12 16 11 22 19 20 23 25 26 35 24 67 46 29 27 21 21 PG - 16 - 17 16 17 22 21 22 22 22 23 23 25 37 32 31 24 21 18 SYY - 15 - 15 15 13 19 24 23 26 27 25 26 34 30 25 24 20 22 19 WMT - 13 - 14 15 17 16 15 17 21 24 26 36 37 54 38 22 16 18 18 I find it extremely easy to remain invested in these stocks at current valuations.

I agree, there are bargains to be had. I own all the stocks mentioned above except KO and I am still adding to some of those positions.

[modhatter]

CyclingInvestor. Where did you get the information for your chart?

Do you keep a spread sheet of these stocks each year? Great tool.

[RockyMtn]

Very interesting article. I had never thought of putting a value to future pension and SS benefits and then considering them fixed income.

Were one to follow this methodology and one retires prior to say 62 or 65 when pension or SS benefits kick in I guess we would be in a situation where we would actually be diminishing the % of bonds in our portofolio as we aged. Quite the opposite than general thinking but certainly seems to make sense

[HFWR]

Quote:

Originally Posted by CyclingInvestor Expensive ? I find many bargains available, and only a few that are 'bubbling' at all. Here are many of my favorite stocks, with current P/Es vs the last 17 years - Current Historical PE Sym PE 10 09 08 07 06 05 04 03 02 01 00 99 98 97 96 95 94 ABT 11 11 14 15 18 16 15 19 21 21 32 27 20 30 21 18 17 15 ADP 20 19 18 17 22 27 26 27 24 23 37 46 45 39 34 26 25 23 EMR 15 19 17 14 20 18 19 21 23 20 23 28 18 20 20 19 17 15 ITW 14 16 16 12 17 15 16 19 22 20 24 21 23 21 24 19 17 15 JNJ 13 13 14 13 15 17 17 20 20 24 30 30 31 33 28 22 22 16 KO 17 18 17 15 22 19 18 20 27 26 29 44 54 56 44 35 29 24 MDT 12 11 14 11 18 20 23 22 24 26 34 47 33 38 31 24 23 13 MMM 14 15 16 12 17 16 18 20 25 22 28 29 22 18 22 22 20 18 MSFT 11 12 16 11 22 19 20 23 25 26 35 24 67 46 29 27 21 21 PG 16 17 16 17 22 21 22 22 22 23 23 25 37 32 31 24 21 18 SYY 15 15 15 13 19 24 23 26 27 25 26 34 30 25 24 20 22 19 WMT 13 14 15 17 16 15 17 21 24 26 36 37 54 38 22 16 18 18 I find it extremely easy to remain invested in these stocks at current valuations.

For ease of reading...

[clifp]

Very good article one of the better I have read on Seeking Alpha recently.

I am inclined to agree with Ziggy that dividend stocks on a relative basis are overvalued.
For instance two of the great growth stocks AAPL and GOOG have P/E of 10 and 12 respectively lower than many of the dividend stocks from Cycling's list.

I agree with Josh Peters M* Dividend Investor Newsletter that dividend stocks having experience a period of relative over performance are likely to see a period of relative under performance in the next couple of years. That is the bad news.

On the good news relatively to bonds stocks of all flavors look cheap. I don't have a pension but I do count my future SS as part of my bond portfolio. I whole heartily agree with article's author that income is everything to a retiree, especially an early one.

So while I won't be at all surprised to see dividend stock lag growth stock in the next year or two, I am expecting this to be something like 15% for growth stock vs 10% (7% capital gains and 3% dividend) for dividend stock. This relatively under performance doesn't bother me in the least especially, cause I am getting increase income in the form of dividends.