Dividend Growth Investor

[Nords]

Well, it looks like I moved too slowly to make another contribution to the Royalty Trusts thread (http://www.early-retirement.org/forums/f44/royalty-trust-stocks-56038.html#post1068901). But if you’re a diehard dividend stockpicker then here’s another link to help ease the pain of testosterone poisoning.

Dividend Growth Investor: Best High Yield Dividend Growth Stocks

Ed_The_Gypsy knows of this blog. The Dividend Growth Investor is unusual for its author not even offering his (her?) name, let alone a biography or other braggadocio– it’s all about the stocks. The analysis is consistently focused on the quality of the dividend and the stock’s long-term potential. Boring? Well, these aren’t hair-raising volatile microcap tech growth stocks, let alone leveraged Venezuelan beever cheese futures. Enriching? Some of these picks have been consistently raising their dividends for longer than I’ve been alive.

On the blog's home page (Dividend Growth Investor) I recommend perusing the links on the upper right-hand column (conveniently below the "Subscribe" box) for the archives of high-yield stocks and dividend aristocrats.

In an era of computerized stock-arbitrage schemes executing trades in milliseconds, corporations obsessing over the next quarter’s numbers, and mutual funds turning over their entire portfolio every six months, it’s refreshing to read a long-term perspective on a stock’s fundamentals along with a dispassionate recommendation on when to buy it. Every time I read this blog I smell money.

 

[nun]

What is the advantage of using dividend stocks to produce income rather than a long term or intermediate term bond fund? I've always tended to look for income without stock market volatility.

 

[bode316]

Well, it looks like I moved too slowly to make another contribution to the Royalty Trusts thread (http://www.early-retirement.org/forums/f44/royalty-trust-stocks-56038.html#post1068901). But if you’re a diehard dividend stockpicker then here’s another link to help ease the pain of testosterone poisoning.

Dividend Growth Investor: Best High Yield Dividend Growth Stocks

I was a little late myself! Oh well...

 

[NW Landlady]

Thanks for the Link & info, Nords!

 

[Running_Man]

What is the advantage of using dividend stocks to produce income rather than a long term or intermediate term bond fund? I've always tended to look for income without stock market volatility.

The advantage is in picking companies who are committed to raising the dividend over time at faster than the inflation rate, which can result in no need to worry about what other people's opinion on the value of the company you invested in does and instead can concentrate on whether the actual business of the company is increasing as expected leading to further increases in the dividend and not concerning yourself with the PE or sales price of the company today.


The clearest example of this is Coca Cola as purchased by Berkshire Hathaway. Warren bought 7 percent of Coca Cola in 1988 when the dividend was $1.36 per share ( about a 3% dividend at the time) which has grown to the equivalent of $8.00 per share today, if reverse stock splits were to occur to get the same level of shares as in 1988. By 1997 Coke by virtue of being hyped I believe by the Berkshire Hathaway purchase arrived at the same price it is sold for today. Yet that dividend (which was equivalent to $2.36 in 1997 has tripled since then.

 

[nun]

The advantage is in picking companies who are committed to raising the dividend over time at faster than the inflation rate, which can result in no need to worry about what other people's opinion on the value of the company you invested in does and instead can concentrate on whether the actual business of the company is increasing as expected leading to further increases in the dividend and not concerning yourself with the PE or sales price of the company today.

Obviously this strategy requires lots of due diligence and it's performance will be variable between investors, but does it generally provided more income than long term bond funds. There may be interest rate arguments for choosing dividend paying stocks over bonds, but are they really preferable over less volatile fixed income approaches and what does the AA look like of the average dividend stock investor?

 

[Nords]

There may be interest rate arguments for choosing dividend paying stocks over bonds, but are they really preferable over less volatile fixed income approaches and what does the AA look like of the average dividend stock investor?

I agree that individual stocks are more volatile than individual bonds and bond funds, but there seems to be an assumption that a portfolio of individual stocks is more volatile than a bond fund. I'd think that would have to be analyzed for each & every portfolio.

The better question would be: If you're living off the dividends of a collection of stocks or a collection of bonds (and not selling the actual stocks or bonds), then why would anyone care about the volatility?

As others have pointed out, the extra risks of the stock portfolio are more likely to reward a shareholder by staying ahead of inflation. Volatility has been rendered irrelevant because nobody's selling anything. There's still a risk of dividend cuts but a diversified portfolio of aristocrats would've come through 2008-09 just fine. I think an investor who does their homework would be more than rewarded for that risk.

 

[Running_Man]

Obviously this strategy requires lots of due diligence and it's performance will be variable between investors, but does it generally provided more income than long term bond funds. There may be interest rate arguments for choosing dividend paying stocks over bonds, but are they really preferable over less volatile fixed income approaches and what does the AA look like of the average dividend stock investor?

I do not see this as replacing the income from bonds but rather replacing the reduction of principal in a stock portfolio which would occur in the cashing in of stocks in a portfolio for retirement needs. My personal AA is going to be 33% Treasury Bills 33% LT Bonds and 33% dividend stocks when I retire in 3 years however, I have not heard of what the AA is of the average dividend investor. My expectation is that they would tend overall to hold higher asset allocations than the average investor, but I have no data to back that up.

 

[nun]

I do not see this as replacing the income from bonds but rather replacing the reduction of principal in a stock portfolio which would occur in the cashing in of stocks in a portfolio for retirement needs. My personal AA is going to be 33% Treasury Bills 33% LT Bonds and 33% dividend stocks when I retire in 3 years however, I have not heard of what the AA is of the average dividend investor. My expectation is that they would tend overall to hold higher asset allocations than the average investor, but I have no data to back that up.

OK I like that approach and it would be easy to implement with a couple of Vanguard bond funds and VDIGX (dividend growth fund) for the people who aren't stock pickers. The downside might be giving up the capital gains of a more heavily equity weighted AA, but if it's covering your expenses who really cares. My approach is to keep it pretty simple; 45% in long term and intermediate bond index funds; 45% in US and international equity index funds and 10% in short term bonds and cash. Dividends and interest will be used to replenish the cash account and then reinvested if there is extra. I'll rebalance when my AA diverges from my target by 5%.

 

[Bestwifeever]

Very helpful, Nords. Thanks.

 

[HFWR]

Currently, at least, there's a tax advantage to dividends over interest.

 

[nun]

Currently, at least, there's a tax advantage to dividends over interest.

That's not such a big issue for those of us who keep income generators in tax deferred accounts....... and with a 50/50 AA it will be a long time before I will be putting anything except equity index funds and cash in my taxable accounts.

 

[Danmar]

Nords and others have gotten it right. Dividends tend to grow over time and provide inflation protection. This is probably along with longevity risk the biggest risks in retirement. Although dividend paying stocks may seem volatile, if you can live off the dividends why would you care? Dividend cuts are a bigger risk but less likely than price volatility.
My personal retirement income stategy is to live off my pension and dividends. My current yield is around 3.3%. These dividends are taxed in my jurisdiction at much lower rates than interest(16% vs 39%). My largest holding has increased it's dividend by an average of about 10% per year for the last 15years and has not cut it's dividend since the 1930's. I think bonds are particularly risky now given expectations for rate rises and inflation (eventually)

 

[Calgary_Girl]

What is the advantage of using dividend stocks to produce income rather than a long term or intermediate term bond fund? I've always tended to look for income without stock market volatility.

Up here in Canada there is definitely an advantage to receiving dividend income vs. bond income and it's called the Dividend Tax Credit. Taxes are much lower on dividend income .

 

[kcowan]

Yes a study of Canadian Banks over ten years showed that the after tax dividend yield plus capital appreciation outstripped holding their corporate bonds by a substantial margin.

 

[Ed_The_Gypsy]

The better question would be: If you're living off the dividends of a collection of stocks or a collection of bonds (and not selling the actual stocks or bonds), then why would anyone care about the volatility?

This is very persuasive to me.

One interesting tidbit is the claim that the share prices of dividend-paying stocks appreciate more than those of growth stocks.

Soooo, why would someone buy growth stocks?

 

[Nords]

Soooo, why would someone buy growth stocks?

There's probably a difference between the goals of getting retired (and staying that way) and getting rich (and maybe staying that way). Hopefully they're not mutually exclusive...

To be fair, Berkshire Hathaway is a perfect example of a growth stock. It's certainly the antithesis of a dividend stock.

 

[clifp]

This is very persuasive to me.

One interesting tidbit is the claim that the share prices of dividend-paying stocks appreciate more than those of growth stocks.

Soooo, why would someone buy growth stocks?

I am pretty skeptical of that claim. Previous studies I've seen even by big dividend fans such as Josh Peter, M* editor of the dividend investor newsletter (highly recommended), in his book he showed that the total return of dividend stock was marginally higher than non dividend, since dividends were a large part of returns, I bet that price appreciation was less. Other studies have shown the opposite, dividend stocks underperformed non-dividend. The start and ending point is such an important factor of all these studies that it is really hard to make sense of conflicting data.

That said I think on a risk adjusted basis dividend stocks outperform growth stocks.

 

[nun]

No one's said it yet but....... pssst......Wellesley's stock component pays higher than average dividends.

 

[clifp]

No one's said it yet but....... pssst......Wellesley's stock component pays higher than average dividends.

LOL I was just looking at Wellesley and you are right its dividend yield is 3.53% virtually the same as its bond yield. I thought maybe I should buy Wellesley and then I looked at its portfolio and I realized that I already own at least 20 of the 53 stocks that fund owns.

 

[Ed_The_Gypsy]

There's probably a difference between the goals of getting retired (and staying that way) and getting rich (and maybe staying that way). Hopefully they're not mutually exclusive...

To be fair, Berkshire Hathaway is a perfect example of a growth stock. It's certainly the antithesis of a dividend stock.

Full disclosure: I own one share of Berkshire Hathaway and I am waiting for Buffett to die.

 

[Nords]

Full disclosure: I own one share of Berkshire Hathaway and I am waiting for Buffett to die.

At this point all I can suggest is not holding your breath!

The major investors seem to think that the Buffett Premium is just about zero, and that he might even be holding the stock back. But then a lot of people felt that way about Sokol, too, and his departure didn't seem to do much for the share price.

 

[haha]

That said I think on a risk adjusted basis dividend stocks outperform growth stocks.

If true this would be an interesting fact in a supposedly efficient investment-marketplace.

Ha

 

[kcowan]

Liquidating growth stocks to live on is the same as asset allocations. Sometimes you will be up and liquidate less and other times down and liquidate more. But overall you should be OK.

 

[clifp]

If true this would be an interesting fact in a supposedly efficient investment-marketplace.

Ha

It is my hypothesis not a fact. Sort of like a efficient market is an hypothesis. On one side you have a bunch of folks with a PHd arguing that it is on the other side you have Warren Buffett and bunch of other followers of Graham arguing that it isn't that efficient.

My money and I believe your is on the side of the billionaires.