Jump to content

Buying Dividend Growth


Shane
 Share

Recommended Posts

I know it isn't a novel idea, but I was looking at the price of WFC at it's low in 2009 - less than $10. I think WFC could grow to distribute $2.00 in dividends in 5 years.  That means a $200,000 purchase of WFC stock at $10 could pay an individual $40,000 a year... and likely to grow.

 

I know Buffett makes more than his original investment on washington post and probably KO too.  Does anyone on the forum's here focus a portion of their portfolio on stock's that could allow you to sit back and relax from here on out?

 

One huge advantage I see of starting early with a few stocks likely to grow dividends rapidly in the future would be to poise yourself for another special situation like 2009 when there are lots of fat pitches.

Link to comment
Share on other sites

Shane, personally I have been slowly adding undervalued dividend paying securities as a portion(~30%) of my portfolio---all in tax deferred account---its nice getting paid to hold shares. I figure at least I will get some return in a flat market.

 

My personal circumstances may be different than yours as I am approaching a time(age) when I can just stop working.

Link to comment
Share on other sites

That is exactly how I have tailored the majority of my portfolio. (54.15% as of Sept 30, 2011)  My primary focus is on safe and stable companies that pay a large and growing dividend which I can leave on cruise control.  This strategy allows me to build cash to invest in other opportunities which may arise that does not pay a constant stable and growing dividend  (ie. Fairfax, Berkshire Hathaway, Sandridge,  etc)

 

I am also able to use leverage as I have strong cashflow coming in from my core dividend paying positions.  In case of an emergency, the dividend payment easily covers the interest. 

 

-Philip Morris International - yield: 6.82%

-TD bank - yield: 5.05%

-Johnson & Johnson - yield: 3.69%

-KFT - yield: 4.39% (We have not seen dividend increases in a couple of years which has been disapointing as they have been digesting Carbury but large stable dividend growth is very soon)

-CNR.to - yield: 3.08%

 

Over the last 3-4 years, I have focused on this strategy mainly because of Mr. Buffett's investment in KO and See's candy.  His dividend yield on KO is well over 30%+ on his initial investment.  For See's it is over 100%!!!  In the example of KO, if the stock does not move that year, he made over a 30%+ return which is unbelivable! (and that yield grows YoY)

 

Thanks,

 

S

 

I know it isn't a novel idea, but I was looking at the price of WFC at it's low in 2009 - less than $10. I think WFC could grow to distribute $2.00 in dividends in 5 years.  That means a $200,000 purchase of WFC stock at $10 could pay an individual $40,000 a year... and likely to grow.

 

I know Buffett makes more than his original investment on washington post and probably KO too.  Does anyone on the forum's here focus a portion of their portfolio on stock's that could allow you to sit back and relax from here on out?

 

One huge advantage I see of starting early with a few stocks likely to grow dividends rapidly in the future would be to poise yourself for another special situation like 2009 when there are lots of fat pitches.

Link to comment
Share on other sites

I know Buffett makes more than his original investment on washington post and probably KO too.  Does anyone on the forum's here focus a portion of their portfolio on stock's that could allow you to sit back and relax from here on out?

 

I have been tracking my quarterly dividend growth for the past three years. This is a significant portion of my portfolio.

 

There is a blogger who focuses on this strategy that is not deep, but provides some general information for the novice investor:

"Dividend Growth Stocks" http://bit.ly/r5hW2O; I don't like the website but like how he tracks his dividend yield over time and follow via RSS.

Another option: "Dividend Growth Investor" http://bit.ly/oqiZLh

Lastly, A little more detail in the analysis "Dividend Monk" http://bit.ly/nfV5ME

 

Link to comment
Share on other sites

It might feel good to imagine that after many years, you can get 30% or 50% of original investment as dividend but I don't see the point.

 

Bottom line is, whats the return going forward on your current holdings? If current total expected returns are 7-10% then thats the only relevent figure. Why should I feel good about the fact that 20 years ago I put $100 in some stock and now it gives 50% divident on my original investment even if total expected returns going forward might be low?

 

Unless you need income or you are close to retirement, I fail to see the logic. Yes, getting some cash from the holdings allows you to buy stuff if things are cheap but I don't see why anyone should be excited with scenario of 50% dividend on original investment. Am I missing something here?

Link to comment
Share on other sites

All that matters to me is what kind of return I'm getting on incremental dollars earned. For big mature businesses, it might make sense to pay out a dividend because reinvestment opportunities are mediocre, but for businesses that still have much room to grow and reinvest, it can be much better to retain earnings (more tax efficient too).

 

Money productively retained in a businesses will be recognized by the 'weighting' function of the market over time, so dividends aren't intrinsically superior. Money that comes out of the business reduces the market valuation over time. If you really need x% of your portfolio to live on each year, you could just as easily sell part of it.

 

I also think that looking at dividend yield based on initial money invested doesn't make much sense, unless you start to look at everything like that (ie. I bought stock X ten years ago and now it's worth 10x what I paid for, and it grew book value by 10% this year, or 100% of my original investment! Wow!).

Link to comment
Share on other sites

tom connolly, a retired finace prof writes a report at www.dividendgrowth.ca on this concept i think similar to what you are referring.

 

However, there are a few very knowledge investors on the berkshire board that argue fairly convincingly that analyzing your current return based on original cost base is not the optimal investing approach. I can't recall the blogs off hand.

 

 

Link to comment
Share on other sites

I liked the idea of this for a while, buy a bunch of companies growing their dividends at 10-15% a year and just sit and collect the cash.

 

Like others on this board I then realized it didn't really matter where my return came from, either a dividend or appreciation.  I like to buy deep value companies, net-nets etc and a lot of them don't pay dividends but often they'll appreciate fast.  Even if the return works out similar I feel that I have more certainty with the net-net because I know it's undervalued vs having confidence in management that the dividend will actually be increased YoY.

 

I will add this, when I invest in companies I prefer they pay some sort of dividend.  The reason being I want part of the profits returned to me rather than spent, secondly I think it gives management discipline.  From my experience US companies are the absolute worst at paying dividends, in Europe it's normal to see 5-8% yields in strong non-depressed companies.  So if you're going to take this approach invest abroad.

Link to comment
Share on other sites

Rranjan, I guess I don't focus on yield on cost as much as forward looking returns for all my investments. I review every one every quarter and recently focus much more on position sizing than I ever did in the past.

 

My tendacy is to focus on firms that pay stable if not increasing dividends. Much of the historical returns in the S&P 500 are driven by dividend returns not stock appreciation. It reduces the risk of poor managment capital allocation strategies as companies do not build ridiculous cash hoards and it provides returns that can be either reinvested in the existing company through a DRIP or employed into new opportunities. To me, it is another form of check and balance.

 

I don't always trust management to make the right capital decisions and appreciate a cash return on my investment. The key is that the dividend should reflect a comfortable extra cash flow and not a strain on capital. Rebalancing and review need to happen regularly. There are some I invest in that don't pay a dividend, but very few.

Link to comment
Share on other sites

I liked the idea of this for a while, buy a bunch of companies growing their dividends at 10-15% a year and just sit and collect the cash.

 

Like others on this board I then realized it didn't really matter where my return came from, either a dividend or appreciation.  I like to buy deep value companies, net-nets etc and a lot of them don't pay dividends but often they'll appreciate fast.  Even if the return works out similar I feel that I have more certainty with the net-net because I know it's undervalued vs having confidence in management that the dividend will actually be increased YoY.

 

I will add this, when I invest in companies I prefer they pay some sort of dividend.  The reason being I want part of the profits returned to me rather than spent, secondly I think it gives management discipline.  From my experience US companies are the absolute worst at paying dividends, in Europe it's normal to see 5-8% yields in strong non-depressed companies.  So if you're going to take this approach invest abroad.

 

Looks like I crossed paths with your post...similar thought pattern. I would note that European companies don't buy back stock as frequently as US companies and this explains a good portion of the difference in yields based on my recollection.

Link to comment
Share on other sites

Rranjan, I guess I don't focus on yield on cost as much as forward looking returns for all my investments. I review every one every quarter and recently focus much more on position sizing than I ever did in the past.

 

My tendacy is to focus on firms that pay stable if not increasing dividends. Much of the historical returns in the S&P 500 are driven by dividend returns not stock appreciation. It reduces the risk of poor managment capital allocation strategies as companies do not build ridiculous cash hoards and it provides returns that can be either reinvested in the existing company through a DRIP or employed into new opportunities. To me, it is another form of check and balance.

 

I don't always trust management to make the right capital decisions and appreciate a cash return on my investment. The key is that the dividend should reflect a comfortable extra cash flow and not a strain on capital. Rebalancing and review need to happen regularly. There are some I invest in that don't pay a dividend, but very few.

 

Even though I don't do it personally, I do understand the argument for investing in companies with dividend. My main point was that I don't see any logic in looking at current yield on original cost basis. It is good to use as an example to convince people to hold stock for long term( not the crowd here rather an average Joe) but I don't see any reason why original cost basis should come into the picture when thinking about investment merit.

 

At times, I have seen people quoting dividend yield based on original cost basis earlier also but never understood the reason. I thought, I might be missing something so raised the quetion. I perfectly understand all points you wrote about investing in divident paying stocks.

Link to comment
Share on other sites

I am a bit confused as what is the difference between both examples? They both returned 30% in 2010 either though capital gains or dividends.  It will be significantly difficult for scenario #1 to outperform scenario #2 over the long term especially since KO is able to increase it's dividend 7-10% YoY over the long term. 

 

Scenario #1

 

You have a portfolio that returned 30% in 2010

 

Scenario #2

 

I am holding KO with a dividend yield based on initial cost of 30% in 2010

Link to comment
Share on other sites

I am a bit confused as what is the difference between both examples? They both returned 30% in 2010 either though capital gains or dividends.  It will be significantly difficult for scenario #1 to outperform scenario #2 over the long term especially since KO is able to increase it's dividend 7-10% YoY over the long term. 

 

Scenario #1

 

You have a portfolio that returned 30% in 2010

 

Scenario #2

 

I am holding KO with a dividend yield based on initial cost of 30% in 2010

 

Well, no.  Since your KO has a much higher value now than your initial cost, it is appropriate to calculate your dividend yield against the value of that money today.  So the opportunity cost of holding is much higher.  Taxes are the one thing that can change this calculation, but you still have to start based on current values.

Link to comment
Share on other sites

I am a bit confused as what is the difference between both examples? They both returned 30% in 2010 either though capital gains or dividends.  It will be significantly difficult for scenario #1 to outperform scenario #2 over the long term especially since KO is able to increase it's dividend 7-10% YoY over the long term. 

 

Scenario #1

 

You have a portfolio that returned 30% in 2010

 

Scenario #2

 

I am holding KO with a dividend yield based on initial cost of 30% in 2010

 

In scenario 1 the 30% return is calculated relative to the previous year value (recent value). 

 

In scenario 2 the 30% yield is based on a cost basis that is from a long time ago (maybe share prices from 15 or 20 years ago).

 

 

Link to comment
Share on other sites

Sorry I missed a lot of these posts - Vacation.

 

I would look at the dividend portion of my portfolio as income generation.  Total return of course is the metric that should be used to evaluate success.  The reason I bring up initial cost is just for the sake of the point I was trying to make.  I fantasize about the day I could live off of my investments!

 

 

Link to comment
Share on other sites

I am in the same situation since that would be Utopia!  I am only 30 but my goal is to fully retire at the age of 45 and live off my dividend income.  In the next couple of years I will be earning close to $1,000/month from dividends (before taxes) and my ultimate goal is for the dividend distribution to replace my income. 

 

Sorry I missed a lot of these posts - Vacation.

 

I would look at the dividend portion of my portfolio as income generation.  Total return of course is the metric that should be used to evaluate success.  The reason I bring up initial cost is just for the sake of the point I was trying to make.  I fantasize about the day I could live off of my investments!

Link to comment
Share on other sites

You and I look at things the same Ourkid8.

 

Being young and poor I usually try to focus on things which have limited downside and big upside potential (Something that might go up 3-5x in a moderate timespan).  I'm considering accepting lower upside potential on some purchases from this point onward if I think the income will grow and downside is limited.  Maybe 20-30% of the total portfolio on this.

 

This won't be a lot of money now, but over time It could provide a nice income stream.

Link to comment
Share on other sites

Rranjan, I guess I don't focus on yield on cost as much as forward looking returns for all my investments. I review every one every quarter and recently focus much more on position sizing than I ever did in the past.

 

My tendacy is to focus on firms that pay stable if not increasing dividends. Much of the historical returns in the S&P 500 are driven by dividend returns not stock appreciation. It reduces the risk of poor managment capital allocation strategies as companies do not build ridiculous cash hoards and it provides returns that can be either reinvested in the existing company through a DRIP or employed into new opportunities. To me, it is another form of check and balance.

 

I don't always trust management to make the right capital decisions and appreciate a cash return on my investment. The key is that the dividend should reflect a comfortable extra cash flow and not a strain on capital. Rebalancing and review need to happen regularly. There are some I invest in that don't pay a dividend, but very few.

 

Even though I don't do it personally, I do understand the argument for investing in companies with dividend. My main point was that I don't see any logic in looking at current yield on original cost basis. It is good to use as an example to convince people to hold stock for long term( not the crowd here rather an average Joe) but I don't see any reason why original cost basis should come into the picture when thinking about investment merit.

 

At times, I have seen people quoting dividend yield based on original cost basis earlier also but never understood the reason. I thought, I might be missing something so raised the quetion. I perfectly understand all points you wrote about investing in divident paying stocks.

 

Especially considering the low rate environment we are in, this dividend focused strategy doesn't make sense.  It may have worked in the past when rates were trending down.  If and when rates go up, capital losses will more than offset the dividends at any point of time.  Key, still is, buying with a MOS.

Link to comment
Share on other sites

The idea that dividends limit downside is an illusion. Quality of business/management, and valuation limit downside. Dividends are just a tax inefficient distribution of value already created. Focus on the value not the distribution of the value.

 

While blue chip stocks that happen to pay dividends are generally cheap right now, many stocks that dividend lovers frequent are overvalued, like REIT's and some MLP's. These seem to be overvalued because they pay out all of earnings and yield better than bonds or a bank account.

 

I'm short a few REIT's that are overvalued mostly because they pay high dividends. Many are making dumb business decisions and are overexpanding (HCN), or have disadvantageous corporate structures (UHT), or have a riskier/low quality/opaque tenant base yet are considered blue chip (O).

 

These problems are glossed over by retail investors because they are hypnotized by the arbitrary stripper like appeal of dividends.

 

Some companies have even made a job out of paying way more out in dividends than they earn, and selling stock to make up the difference. A venerable dividend ponzi scheme (STON). They get away with it because people are bidding up the shares for the dividend, which is really just a return of their own capital in this case.

Link to comment
Share on other sites

The idea that dividends limit downside is an illusion. Quality of business/management, and valuation limit downside. Dividends are just a tax inefficient distribution of value already created. Focus on the value not the distribution of the value.

 

While blue chip stocks that happen to pay dividends are generally cheap right now, many stocks that dividend lovers frequent are overvalued, like REIT's and some MLP's. These seem to be overvalued because they pay out all of earnings and yield better than bonds or a bank account.

 

I'm short a few REIT's that are overvalued mostly because they pay high dividends. Many are making dumb business decisions and are overexpanding (HCN), or have disadvantageous corporate structures (UHT), or have a riskier/low quality/opaque tenant base yet are considered blue chip (O).

 

These problems are glossed over by retail investors because they are hypnotized by the arbitrary stripper like appeal of dividends.

 

Some companies have even made a job out of paying way more out in dividends than they earn, and selling stock to make up the difference. A venerable dividend ponzi scheme (STON). They get away with it because people are bidding up the shares for the dividend, which is really just a return of their own capital in this case.

 

Well said Hester. Dividens does force management to work with less capital going forward and force them to use it little bit wisely but as you pointed out some companies are abusing this mindset by paying more than they earn. Anyway, I don't need income neither I see dividend as very efficient means to return money. I do see the point but don't see benefits outweighing the negetives most of the time.

Link to comment
Share on other sites

Who on this thread said dividends limit downside?

 

Hester - I think there is a lot of value in that post, thanks.  What I am talking about here is starting young to pick some winning stocks that could grow distributions over time.  I would argue there is some value in knowing a steady stream of cash was coming as it would allow you to invest a little more heavily.  I am thinking from an individuals perspective not a portfolio manager though.  We are agreeing but talking from two different perspectives.

 

I am thinking of things as someone without a job (student).  The income would be of value in the future, investment returns are lumpy unless you are a PM or have a salary.

Link to comment
Share on other sites

Who on this thread said dividends limit downside?

 

Hester - I think there is a lot of value in that post, thanks.  What I am talking about here is starting young to pick some winning stocks that could grow distributions over time.  I would argue there is some value in knowing a steady stream of cash was coming as it would allow you to invest a little more heavily.  I am thinking from an individuals perspective not a portfolio manager though.  We are agreeing but talking from two different perspectives.

 

I am thinking of things as someone without a job (student).  The income would be of value in the future, investment returns are lumpy unless you are a PM or have a salary.

 

Shane - It is a fallacy to consider just dividends is the point. 

I believe Buffett once said that you could create your own dividend stream by selling shares.  Assuming you find the next Berkshire (when it was trading at say 19 or so) and put it 100 shares into your Roth, you could take over 9% every year just selling shares at book value and still be left with one A share after 46 years. 

Link to comment
Share on other sites

So I mostly agree with what's been said in this thread, but also see two points I disagree with:

 

1) Dividends limit management - While this might be true of a company that is paying out too much I don't think this is normally the case.  Take a look at Apple, they have a growing cash pile with nothing to do with it, paying a dividend out of cash would do nothing to harm the business.  On the contrary look at many of the cheap IT companies right now, they pay pithy dividends and are wasting cash on terrible acquisitions (HPQ).  I'm guessing a shareholder of HP would rather have had some of the profits back.

 

2) The idea of selling shares to fund a personal dividend.  I see this idea a lot with index investing, the total return concept.  Sounds great right, perfect financial theory.  So what happens when you need to sell your shares in March 09?  Sucks selling at a bottom, this is where having some companies that pay dividends reliably makes sense.  If you are earning income from your portfolio to pay bills the last thing you want to do is sell in a depressed market.  Consider this, at the market low all of your expenses suddenly cost 50% more because you have to sell double the shares you would have months earlier.

 

I think the truth is in the middle on this, dividends seem to have some passionate people who love them.  My grandfather owned stocks that paid great dividends and he was able to golf 3-4 times a week because he just sat back and collected the money.  I think there is some wisdom there, yet at the same time most of us are on this board because we want to dig deeper and aren't content with dividend stream growing 7% a year. 

 

For myself I focus on undervalued investments, I like it when companies pay a dividend, but if one doesn't I don't pass it over.  I would say that probably 85% of my holdings pay out something all the way from a .2% yield on Mastercard to my 11% yield on Corticeira Amorim.  But in no case did I buy a stock for the dividend, I bought it because it was undervalued, the dividend is a bonus.

Link to comment
Share on other sites

 

 

Shane - It is a fallacy to consider just dividends is the point. 

I believe Buffett once said that you could create your own dividend stream by selling shares.  Assuming you find the next Berkshire (when it was trading at say 19 or so) and put it 100 shares into your Roth, you could take over 9% every year just selling shares at book value and still be left with one A share after 46 years.

 

Well of course, I didn't think that point needed to be expressed.  Nobody said anything about ignoring fundamentals and business dynamics for the sake of dividends.

Link to comment
Share on other sites

 

 

Shane - It is a fallacy to consider just dividends is the point. 

I believe Buffett once said that you could create your own dividend stream by selling shares.  Assuming you find the next Berkshire (when it was trading at say 19 or so) and put it 100 shares into your Roth, you could take over 9% every year just selling shares at book value and still be left with one A share after 46 years.

 

Well of course, I didn't think that point needed to be expressed.  Nobody said anything about ignoring fundamentals and business dynamics for the sake of dividends.

 

Well, if you are saying that business dynamics and fundamentals are good, it will reflect in ROIC and hence, it is better if you let it reinvest in the business.  There are a lot of situations where it is tax efficient to do so - like advertising cost for GEICO or some employee costs for a software company - these can be charged to PL for tax, but keep on giving. 

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...