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]

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]

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]

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]

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]

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]

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]

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]

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]

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]

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.

 

[CyclingInvestor]

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

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

Initially (in the 90s) I started with Value Line numbers. By the late 90's I was using the 10Ks from Edgar for historical info (for adding new stocks). For current earnings I just use reported earnings, adjusting for those things that I find important.

I keep everything in an Excel file, taking snapshots every 6 months.

 

[NW-Bound]

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.

Perhaps the market is skeptical that AAPL and GOOG can maintain their recent growth into the future?

Anyway, I also believe that even if dividend stocks lag growth stocks in the near future due to last year's outperformance, they will not get pummeled as hard as growth stocks get when the latter stop "growing". Yes, this from a guy who likes to buy stocks for capital gains.