Value Investing News

Any company could afford to boost distributions in a single year. Any type of business could also have a high yield, especially if it distributes all of its cash flows to shareholders. It takes a special kind of a business model to afford a proper balance between investing back into the business and distributing excess profits to shareholders.

For dividend growth investors, there are certain attributes of investments that are more relevant than others, such as yield and dividend growth. To illustrate the power of dividend growth consider that an investment’s yield-on-cost will double every 5 years if they grow their dividend by 15%/year or 7 years at 10%/year or 14 years at 5%/year.

I am a firm believer that asset allocation plays a significant part in a portfolio’s long-term results. Recently, I received a question asking if you could have a diversified portfolio of dividend stocks. It is an interesting question that deserves further examination.

The primary focus of my income portfolio is to create ever-increasing income by investing in dividend growth securities. This means that often I will choose a lower yielding security with better dividend growth prospects over a higher yielding security. However, I will also invest in some high yield securities. Here are some of the better performers, along with my life-to-date return:

The dividend aristocrats list includes companies which have increased dividends for over 25 years in a row. It is equally weighted and re-balanced once an year. Over the past 3,5 and 7 years the index of elite dividend stocks has managed to outperform the S&P 500 by 5%, 3.7% and 4.40% respectively.

There are certainly many ways to categorize the different styles of investing in dividend stocks, including yield, risk, growth, etc. Over the years, I have found that most dividend investing styles fall into one of the three major categories listed below:

Deep-down in my soul, I am a contrarian. I felt a sense of excitement entering October. This is the month that stocks have traditionally gone on sale. I was prepared to make a double allocation depending on the level of the markets decline. It didn’t happen.

Adding a degree of risk to your income portfolio can potentially boost your returns. Obviously, this needs to be kept in check because many (most?) risky investments never pan out. So instead of a boost in return, the risky investments end up being a drag on your portfolio.

Most companies use debt for a variety of reasons in their operations. It could be either short term or long-term obligations. If there’s anything the 2007-2009 financial crisis has taught us, it is that excessively leveraged companies could easily blow up after a chain of negative events. Thus it pays to know what the debt situation for a particular company you are investing in actually is.

I am a firm believer in keeping things simple. However, you can simplify things to the point they no longer have value. In my opinion, a lot of the commonly used financial metrics can be very misleading unless you understand what is behind them. Let’s take a closer look at Dividend Payout.

When people learn that I am an income investor, the reaction is often a desire to discuss high-yield investments. The uninitiated commonly confuse income investing with high-yield investing. The two are not the same.

It is not unusual after I publish a list of stocks to get a comment or two asking why those stocks and not these stocks. Often the real thrust of the question is why buy those low yield stocks when you can buy these high yield stocks. The answer involves risk and its management.

As an investor in the accumulation stage, I tend to focus on companies with yields of at least 3% and expectations of future dividend growth. Most of these companies have a history of consistent annual dividend increases which exceeds ten years.

Had management had the stones to forego the dividend for fiscal 2008, and not squander company resources on stock buybacks, the company would have had to borrow no money and could have paid down existing debt by almost 9%.

As summer turns to fall and the heat begins to moderate, winter and its freezing temperatures are just around the corner. However, some companies have been frozen in place for the last year; more specifically, their dividends have been frozen at the same rate for more than a year.