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haha 02-08-2012 11:01 AM

Here Is A Pretty Good Brief In Favor Of Dividend Growth Investing
 
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 02-08-2012 02:35 PM

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 02-08-2012 02:36 PM

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 02-08-2012 02:54 PM

Quote:

Originally Posted by ziggy29 (Post 1159200)
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 02-08-2012 03:00 PM

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 02-08-2012 03:04 PM

Quote:

Originally Posted by ziggy29 (Post 1159200)
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 02-08-2012 03:29 PM

Quote:

Originally Posted by FIREd (Post 1159217)
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 02-08-2012 03:32 PM

Quote:

Originally Posted by FIREd (Post 1159217)
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 02-08-2012 04:05 PM

Quote:

Originally Posted by ziggy29 (Post 1159229)
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 02-08-2012 05:20 PM

Quote:

Originally Posted by FIREd (Post 1159217)
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 02-08-2012 05:31 PM

Quote:

Originally Posted by redduck (Post 1159264)
Since the beginning of the year? Is that just about five weeks?

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

grumpy 02-08-2012 06:07 PM

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 02-08-2012 06:52 PM

But boy, 2011 returns are sweet.

http://www.early-retirement.org/atta...882752785b.jpg

CyclingInvestor 02-08-2012 06:56 PM

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 02-08-2012 07:32 PM

Quote:

Originally Posted by CyclingInvestor (Post 1159301)
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 02-08-2012 07:40 PM

Quote:

Originally Posted by CyclingInvestor (Post 1159301)
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 02-09-2012 09:23 AM

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

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

RockyMtn 02-09-2012 10:18 AM

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 02-09-2012 10:31 AM

Quote:

Originally Posted by CyclingInvestor (Post 1159301)
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
SymPE1009080706050403020100999897969594
ABT111114151816151921213227203021181715
ADP201918172227262724233746453934262523
EMR151917142018192123202328182020191715
ITW141616121715161922202421232124191715
JNJ131314131517172020243030313328222216
KO171817152219182027262944545644352924
MDT121114111820232224263447333831242313
MMM141516121716182025222829221822222018
MSFT111216112219202325263524674629272121
PG161716172221222222232325373231242118
SYY151515131924232627252634302524202219
WMT131415171615172124263637543822161818

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

For ease of reading...

clifp 02-09-2012 04:40 PM

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.


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