Use access key #2 to skip to page content.

truthisntstupid (83.28)

Dividends vs Capital Appreciation and Independence From The Herd

Recs

73

February 21, 2010 – Comments (49)

I'm bored.  So I thought maybe I would try again to explore why some of us prefer income to capital appreciation.   I've tried before.  I think I can do better this time.   First off, why do stock prices fluctuate?  What drives changes in share prices?   Suppose a company takes off and revenues and earnings start trending sharply upward.  Fine.  But the share price doesn't respond directly to that.  The share price starts climbing when enough of the herd finds out and more people want to buy it.  Nothing moves share prices by itself.   Some very large investors can buy or sell enough shares to momentarily affect the price, but by and large the herd determines the share price.    Whether the herd is responding to a great quarter or a disaster, or recent press release, the most direct driver of the share price is the interaction of buyers and sellers in a market folks like us have no control over.

Like it or not, traditional value investors, growth investors, smallcap, international, you name it, if you're hoping to find an opportunity to buy shares in a company that you hope to sell at a gain later, your return depends on the herd.   You find an undervalued stock, or stock in a company you think will have outstanding growth, you snap it up...and wait.   Maybe everybody else is preoccupied with other stocks or sectors for some indefinite period of time.  Or you have to wait for the growth to materialize, and Mr Market to finally recognize an increase in value.   So you wait.   Eventually, if you chose a good investment, your wait will be rewarded.  Now you have to try to outguess the herd and take at least some profits before everybody else does and causes the share price to fall.  Good job.  You made some money.  The rest of the herd eventually came around.   To all this I will return.

I have owned The Intelligent Investor  in hardback for about twenty years.  If I've read it once I've read it forty times.  And will again.  I'm not down on value investing.  I do sometimes wonder if we are living in a time where value investing is becoming too popular to work as well as it did for Ben Graham.  Also, he would spend days and weeks doing research we can do in a few hours.  Makes me wonder.  But I'm not knocking it.

I just found something I like better.  And I think I can do a better job explaining why this time.

                  Income is more stable than prices

Share prices respond to a moody and whimsical public.   At any given moment the price you may receive for your shares is determined by other people's perception of their value.   Your portfolio is only worth what the herd is willing to pay for it.  Period.   And that value constantly fluctuates.  

                   Leaving the herd

Years ago, Warren Buffet finally became rich enough to start buying entire companies, taking them private.   In doing so, he gave up the opportunity to sell or trade these companies on the market.  He further said his  "favorite holding period was forever."   In doing so, he gave up the potential to realize capital appreciation instead choosing to seek his returns outside and independent of the market.   One aspect of Buffet's value strategy that eludes many investors is that Buffet is a fan of companies which distribute a portion of their excess earnings back to Berkshire.  This allows Buffet to reinvest the proceeds into new companies which allows him to further compound his invested capital.  You might think, "well, yeah but that's what he's doing with companies he owns outright."  Really?  He doesn't own Coca-Cola or the Washington Post outright. 

Berkshire's average cost basis in KO is $6.49/share.  Last year KO paid an annual dividend of $1.64/share, giving Buffet an annual yield on cost of 25.3%.  200M shares of KO brought in 328M in dividends for Berkshire last year.   KO closed Friday at $55.72. 

Berkshire's average cost basis in the Washington Post is $6.15/share.   With an annual dividend of $8.60, Buffet is realizing an annual yield on cost of 139.8%.   The Post closed Friday at $415.32.

Did you know Buffet's cost basis in the Post was  1/67th  of today's share price? 

           What this has to do with me

I want to build a retirement income.  And I don't want the volatile moods and unpredictable emotions of the herd to be able to screw it up.   Look.  Some people will point out that if you want income, you belong in bonds.  I don't know a lot about bonds although years ago I used to read a lot about them too.  But bonds probably don't have the potential to provide a growing income which can hopefully keep up with inflation.  And I do believe many people smarter than I am think we're bound to have some inflation in the coming years.   Which means when you gat the face value of your bond back ten years later, it's going to be worth much less than that same face value was years earlier when you bought the bond.

Anti-dividend people will point out that you can focus on building up a large enough portfolio and simply plan on it returning a certain average amount of growth each year and periodically sell off shares for income, saving the taxes you'd pay on the dividends along the way.  There are two problems with this.  The first one I wrote about in another blog, warning of the risk involved when you retire and start dollar-cost averaging in reverse.  When you are living off the income from periodically selling off shares, if the share price goes down and stays there for an extended period, you will have to sell off more shares every month to provide the same amount of income.  You have become the seller, and the market has become the buyer...dollar cost averaging off of you.

Here's the other problem with periodic selling of shares for income.  Your return from sale of shares is comprised of two distinct components:  A capital appreciation component and an income component.

    The capital appreciation component depends on the value the herd perceives your shares to have at the time you want to sell shares.  This component is subject to wide swings in price over a year, let alone decades of retirement.

    The income component is simply the dividend income your shares bring in.  If your chosen companies have significant competitive advantages and are well run, their financial strength and ability to pay those dividends is unaffected by the herd's constantly changing perception of their value.

If you depend too much on the capital appreciation component in retirement, every time shares are sold to eat or consume fewer shares are left to generate the income component, and the retiree becomes ever more dependent on capital appreciation.   And no retired person should be more dependent of what others'  perceptions of what their portfolio value is than on the income stream their portfolio can generate despite others'  perceptions. 

I will not in my lifetime be rich and able to buy entire companies like Warren Buffet.  That doesn't mean I can't apply the same philosophy in a smaller way.  Most of the companies Warren Buffet has invested in have wide moats, or durable competitive advantages.   This is also the foundation behind the best dividend growth stocks.  Only companies with strong competitive advantages can consistently grow earnings to provide long-term dividend growth, without a large need of frequent capital infusions.  These companies'  financial strength and ability to pay dividends is unaffected by the madness of the herd.   The price swings in the value the herd places on your shares will fluctuate wildly over the years, but with well-chosen companies that pay dividends and increase them annually, your yield on cost will increase every year. 

Independence.   Dividend investors try to seek a large portion of their return independent from the market.  Unthreatened by the insanity of the herd.  

Do I try to  "beat the market?"   No.  I don't.   I don't care what the market does.  If I own shares in a company and the share price drops, and the underlying company's financial strength and ability to pay the dividend remains unchanged, I want to buy more.  When everybody's complaining about a flat market or a bear market, I'm buying.   So far I've beaten the market, but not because I'm trying to.

      A word to newbies

Dividend investors are constantly criticized for not having an exit strategy.  This criticism is not unfounded if you don't make a hobby of reading and studying and educating yourself.  No investing system is so simple  "a caveman can do it."   Learn how to read financial statements.   Learn how to watch for things that should throw up a red flag and cause you to recognize when a company's ability to maintain and grow its dividend might be deteriorating.  As long-term dividend investors, we hope to buy and keep.   But if you can't recognize when you really ought to think about selling, you're likely to be burned some time when it could have been avoided. 

Here's some great books

The Intelligent Investor  by Ben Graham)  Anybody that ever wants to buy individual stocks should read this.   Dividend investing is not the same as value investing, but you'll still learn things valuable to any investor in stocks from this book.  It's a classic, and rightfully so.

The Little Book That Builds Wealth  by Pat Dorsey)  Corny title, I know.  You won't find a better, more complete book on "moats,"  or durable competitive advantages.   There's a chapter on each of four different kinds of moats.  There's a chapter on valuation.  There's a chapter exploring the fact that some companies are by nature poor long-term investments, because some industries are just too fiercely competitive to allow them to sustain a competitive advantage over the long term.   How to recognize competitive advantages.  Pat Dorsey is head of equity research at Morningstar.

The Ultimate Dividend Playbook  by Josh Peters)  It is the only book on dividend investing you'll ever need.  It is exactly what its title claims it to be.  Valuing stocks, many tips on analysis and how to tell if a dividend is sustainable, and the easiest-to-understand presentation of what's known as the DuPont system of analysis I've ever seen.

Read articles here on Motley Fool, watching for tips on how to spot an endangered dividend.  Also, over on Seeking Alpha, watch for and read articles by David Van Knapp, Dividend Growth Investor, And Dividends4Life.  When researching a particular stock, check over on Seeking Alpha and chances are if its a good long-term dividend stock, Dividend Growth Investor or Dividends4Life has done an excellent write-up and dividend stock analysis on it. 

Develop a reading schedule.  And don't fall into the trap of chasing high yields.  Be careful out there.

 

49 Comments – Post Your Own

#1) On February 21, 2010 at 3:58 PM, Bludgeoner (< 20) wrote:

Wow!!  I like where you went with this post...I'm glad you didn't get it right the first time because you nailed it this time!  I've been looking at getting in dividend investing for a while now but I've been hesitant because of the potential capital gains of growth stocks.  You just convinced be because of this section alone:

Berkshire's average cost basis in KO is $6.49/share.  Last year KO paid an annual dividend of $1.64/share, giving Buffet an annual yield on cost of 25.3%.  200M shares of KO brought in 328M in dividends for Berkshire last year.   KO closed Friday at $55.72. 

Berkshire's average cost basis in the Washington Post is $6.15/share.   With an annual dividend of $8.60, Buffet is realizing an annual yield on cost of 139.8%.   The Post closed Friday at $415.32.

Thank you sir - you have my attention!!

 

Report this comment
#2) On February 21, 2010 at 4:53 PM, truthisntstupid (83.28) wrote:

Bludgeoner

Thank you very much!  I really appreciate it!  I've been wanting to articulate this clearly for some time.  When I tried to before I was trying to communicate my message without making it too long.   This time I just decided to give brevity a backseat to getting my message across. 

Report this comment
#3) On February 21, 2010 at 6:04 PM, neskolf (29.70) wrote:

Nice post, tis.

I, too, am a dividend (perhaps more accurately, income) investor.  I don't believe that dividend investing is inherently superior to other forms of investing.  It's just that it happens to best suit my psychological tenor.  Boiled down into its simplest form, my philosophy is that I would rather rely on an investment that generates a predictable, periodic amount of income as opposed to the latent potential of capital appreciation for increasing my asset base.  Knowing that I have X coming in on a quarterly basis allows me to build a strategic framework.  As a trade-off, I don't expect any of the companies in which I invest to double in price in the foreseeable future.

I like your note to newbies, and I believe it's important to stress the difference between a dividend investor and a dividend chaser.  To me, dividend chasers care about yield, and yield only, giving little thought to the sustainability of the dividend.  A dividend investor knows that there should be a vetting process as stringent as any of those employed by value or growth investors.

As briefly as I know how to describe it, here is how I go about identifying a potenial investment.  I do not claim to have a superior method.  In fact, if there is a flaw in my process, I would love to have feedback.  I'm always looking to improve:

1) Yield >/= 5.5%:  If a long term bond pays roughly 4.75%, then I'm looking to receive more in return for assuming the greater level of potential (some might say hypothetical) risk of investing in the stock of a company.  Now, if I simply stopped here, I would rightfully be considered a dividend chaser.  But I don't.  This is simply a jumping off point.  Next, I want to convince myself of the safety of the dividend.

2) A five year track record of either increasing or steady payments.  No missed payments, no reductions (adjusted for splits).  To me, the past five years have presented a number of challenging scenarios to the management teams of companies.  How well prepared to handle those challenges were they?  A steady, or increasing dividend over this time frame indicates to me that they were at least adequately prepared.  Now, as we know, past performance is not an indicator of future results.  So, to stop here would be foolish (with a lower case 'f').  Even a fifty year track record of payouts is worthless if the dividend is in danger of being cut in the next quarter or two.  So it's time to move to step three.

3. An examination of the current sustainability of the dividend.  This is an exercise in fundamental analysis.  I examine the prior two years' worth of statements to get insight into the direction the company is moving, paying particular attention to management commentary (are they up front about what's gone on in the company?,  Have they done what they've said they would do?, etc).  Naturally, I look at the payout ratio and pay particular attention to the company's cash position.  If a company is supporting the dividend via consistent cash burn or leveraging it through debt, I want no part of it. 

4. No net insider selling.  If the collective management is not confident n the future prospects of an enterprise, why should I be?

Lastly, and perhaps most important of all, I need to be able to understand the business at least at a rudimentary level.  If I wouldn't be able to tell you how a business generates its revenue in a paragraph or less, that's a business that's too complicated for me.

This may not be so simple that caveman can do it, but it's certainly not brain surgery.  It does require some diligence and discipline, though.  When presented with a generous yield, it can be tempting to convince one's self that a company is merely currently going through a temporary rough patch.  

I apologize for such a long-winded reply.  But I appreciated your initial post and the opportunity that it presented to share some thoughts.

Report this comment
#4) On February 21, 2010 at 6:10 PM, neskolf (29.70) wrote:

Addendum:

I knew I'd forget something.  Exit strategy. I have one.  And, again, if someone can spot a flaw in it, please share the feedback.

Simply put, if a security experiences a percentage of capital appreciation (calculated to be post tax) in the span of a quarter that exceeds the yield at which I've bought in by a factor of two (i.e, a div yield of 6% would require at least a 12% capital gain) I cash in.  Now, I realize there is the potential that I may miss out on further growth in share price.  However, I'm willing to make that tradeoff to secure my profit and look to reinvest it in a promising opportunity.   

Report this comment
#5) On February 21, 2010 at 6:34 PM, ByTheNumbers (95.31) wrote:

Great article!

Report this comment
#6) On February 21, 2010 at 6:47 PM, truthisntstupid (83.28) wrote:

neskolf

Sounds like we're a lot alike in the way we go about evaluating a potential investment.  I don't plan on selling unless the dividend appears threatened or the company slows the dividend growth rate way down for more than 1 year, though.  I also like to use the average dividend growth rate and the "rule of 72"  to give me an idea of how often I can expect the dividend to double.  Of course, if a company has had a very good rate of dividend growth over the last few years and puts the brakes on a little, I wouldn't sell it because of that.  I did take some gains this year, because after reading The Ultimate Dividend Playbook, I realized I didn't want to hold onto all those utilities over the long term.  Utilities have very poor dividend growth rates compared to many market-leading companies with good moats such as PEP.   Over the last several years, PEP has had an average dividend growth rate of 12 - 15%.  That dividend will double every 5 or 6 years if PEP resumes its past rate of dividend growth (they only raised their dividend by about 6% last year).   Yeah...I want more companies like that. 

If you liked this blog you would also like Todd Wenning's Motley Fool article on long-term dividend growth investing titled  Build A High Yield Portfolio.   Do a search on it and see.

Report this comment
#7) On February 21, 2010 at 7:15 PM, truthisntstupid (83.28) wrote:

ByTheNumbers

Thank you.  I'm glad you liked it.

Report this comment
#8) On February 22, 2010 at 4:15 PM, DavidSobel (< 20) wrote:

I love dividend investing, however you do not have to throw the baby out with the bath water.  I owned 1000 shares of Frontline LTD.  The dividends were pouring in for years at yields that made you want to pinch yourself to see that you were still of this world. Then the stock price went through the roof from $42 to $72  in six months.  I had that uneasy Qualcom feeling again so I sold it all and played the waiting game.  A year later FRO was at ten bucks a share so I now have over 8000 shares of the stock.  They have cut their dividend to .15 and I could care less.  It is trading between $25 and $30 and I am still a buyer and I roll the $1200 a year into more stock.  So it is worth more to me now without the huge dividends than it would have been if they were still paying them out.  Do I think they will ever pay those $3.50 to $5.00 a share per quarter dividends again?  One could only hope that they will!!!! By that time I should own 10,000 shares.  I will be on a golf around the world vacation if they do!

.

Report this comment
#9) On February 23, 2010 at 10:52 AM, Bludgeoner (< 20) wrote:

So i've been looking at some dividend stocks and I came across Verizon VZ.  One thing that is confusing me is the Dividend Payout ratio.  VZ's ratio is 144% but that doesn't seem right.  Does that mean they are paying out 144% of their earnings in dividends?  Should that be a red flag regarding dividend safety?

Report this comment
#10) On February 23, 2010 at 1:04 PM, truthisntstupid (83.28) wrote:

Bludgeoner

My next buy is VZ.  I did several hours of research on VZ last week.  If you go to my CAPS page and look at my ptches and the pitch replies you'll see why I think VZ's dividend is very secure.  Only 28% of their free cash flow was required to cover their dividend for the last quarter reported.  Also, in TMFKopp's blog, And now for some dividends,"   I tell more about the source of my information.  I tend to doubt if this is one to hold and still be holding 15 years from now, but that dividend looks very secure to me for awhile.  I think I'll collect it and keep an eye on things.  I could , of course, be wrong.  Read my pitch, check what I said about it on TMFKopp's blog, read the little tidbit in the article I gave a link to on his blog, and see what you think.   It sounds good to me. 

Report this comment
#11) On February 23, 2010 at 1:23 PM, truthisntstupid (83.28) wrote:

I left one of your questions unanswered.  I think normally a dividend payout ratio so high in relation to earnings is absolutely something I want nothing to do with.  But VZ's PE is listed on Yahoo!Finance at over 22, while its forward PE is listed at around 11.5    Makes me feel a little better there, plus VZ's dividend has required less and less of its free cash flow for many years now. 

Report this comment
#12) On February 23, 2010 at 1:24 PM, Bludgeoner (< 20) wrote:

Thanks for getting back to me Truth.  Dividend investing is a challenge in it's own right - one that I look forward to.  I'm a decent evaluator of stocks but when you evaluate a stock based on dividends, it becomes a different beast!

I'll check out TMF Kopps blog in my spare time (I'm at work now)

Thanks for the head's-up!

Report this comment
#13) On February 23, 2010 at 1:33 PM, truthisntstupid (83.28) wrote:

You're welcome, bludgeoner.  Like I said, I don't know that I trust it for the long term, but I'll collect the dividends and watch it, and hope not to have a reason to sell it for as long as possible.

Report this comment
#14) On February 23, 2010 at 1:47 PM, truthisntstupid (83.28) wrote:

I should mention that danielthebear makes some very valid points opposing my views on dividend growth investing in his blog from yesterday, Dividend Investing: Why Dividend Growth Is Useless As An Investing Mechanism.  It's just something individuals need to make up their own minds about, after considering both sides.

Report this comment
#15) On February 23, 2010 at 2:16 PM, Puckplayr4 (80.68) wrote:

Without owning the book, can you go into why Utility Dividend payers are NOT the best place to have your money? Or your new money?

 

I am into PWE and EDE, both significant dividend payers.

 

Thanks!

 

Clint 

Report this comment
#16) On February 23, 2010 at 2:57 PM, truthisntstupid (83.28) wrote:

Sure.  I did own AEE, AEP, OKE, PGN, PNW, and SCG.

I haven't sold all of them yet.  I have sold out of PNW.  They go years in between dividend increases.  I sold out of PGN for two reasons: around the time I made the decision to sell it, its dividend payout ratio was listed at 97%.  That was only part of the reason.  The Florida PSC (Public Service Commision) denied PGN a rate increase.  With a payout ratio already very high, and the dividend growth rate for the last few years only 1 or 2 %  a year, when PGN failed to increase its Feb dividend, that was enough for me.   Feb has been the month for PGN's annual dividend increase for many years now. 

I haven't sold AEE yet but I know I going to.  I may hold off actually selling it till I've held it for a year.  I may even change my mind.  So now I still hold shares in AEE, AEP, OKE, and SCG.   I'll definitely keep OKE; it has been growing its dividend faster than many non-utilities.  I may keep SCG and AEP, as they have a dividend growth rate that is ok for a utilty.   To look up the past 3-year and 5-year dividend growth rates, go to Dividendinvestor.com

I like utilities.  But if you start comparing their rates of dividend growth with non-utilities like PEP, PG, CVX, CLX, you will see what I'm talking about. 

Take CLX.  Clorox has raised its annual dividend for 32 years now and still has only a 48% dividend payout ratio.  Its rate of dividend growth over the last 5 years has been 12.46%.  It has stepped up its rate of dividend growth over the last 3 years - over the last 3 years it has grown its dividend at the rate of 16.79%.   While they probably can't sustain such a wonderful rate of dividend growth, that rate of dividend growth would have that dividend doubling in 5 years if they did.  So cut 'em some slack and think that dividend will probably double at least every seven years, then in seven years and probably sooner you'd be getting something over 6% yield on cost for shares bought today.  At that time you could re-examine its dividend growth rate and decide whether you want to hold it till that dividend doubled again, giving you an eventual yield on cost of 12% for shares bought today.  In the end, you may wind up collecting dividends from Clorox in 20 years at such a high yield on cost that people will get tired of hearing you brag about it. 

This is why after reading The Ultimate Dividend Playbook, I decided a high yield with a 2 or 3%  rate of dividend growth wasn't good enough for me in the long term.

Report this comment
#17) On February 23, 2010 at 4:55 PM, truthisntstupid (83.28) wrote:

Something I failed to mention is why I was interested in VZ in the first place.  I don't want to wait years for all my dividend investments to have a worthwhile yield.  I gave my reasons for selling PGN (Progress Energy).  PGN pays dividends Feb 1, May 1, Aug 1, and Nov 1. 

VZ is PGN's replacement.  It, too, pays dividends Feb 1, May 1, Aug 1, and Nov 1. 

Report this comment
#18) On February 27, 2010 at 12:43 PM, bernbern0 (< 20) wrote:

Well done truthisntstupid! Very well-written and wonderful advice to both newbies and "oldies"! I too am a big fan of DividendGrowthInvestor, Dividends4Life, and David Van Knapp on SeekingAlpha as well as many of TheMotleyFools. (And you too I might add) In fact, I think you should be a featured writer on TheMotleyFool and SeekingAlpha. Your advice is always a great counter to the many gloomers and doomers out there. Keep up the good fight!

Report this comment
#19) On February 27, 2010 at 3:25 PM, truthisntstupid (83.28) wrote:

bernbern0

Thank you!   Did you know that dividend Growth Investor posts blogs here, too?  On Motley Fool he calls himself Sagitarious84.

Report this comment
#20) On March 01, 2010 at 6:24 PM, bernbern0 (< 20) wrote:

I will follow Sagitarious84's posts as well as yours. Thanks truthisntstupid.

Report this comment
#21) On March 04, 2010 at 7:32 PM, Teacherman1 (55.68) wrote:

Great post. Sorry I missed it the first time around. Haven't been in CAPS a lot lately, and when I do, it is usually only for a quick peek and a comment or two.

Got a new student who is Autistic, and am having to work a lot harder than I really want to at my age.

Keep making these kinds of posts. I am sure many will benefit from it.

Have a good evening. 

 

 

Report this comment
#22) On March 04, 2010 at 8:00 PM, truthisntstupid (83.28) wrote:

Thanks, Teacherman! 

Don't work too hard.  I thought you didn't seem to be around as much.   I bet you're a good teacher.

Report this comment
#23) On March 06, 2010 at 2:11 PM, exdivy (< 20) wrote:

Truth,

Great blog! You seem to have a good handel on both appreciation and income - at least, one I agree with. I think the best strategy is one that combines both in the short term!

I realize this is hard to do, but I found a REIT, RSO, that is currently paying around a 14% dividend at $7.

The CEO in the last CC (a few days ago) said he was confident in the dividend every quarter for the coming year. They have never missed a dividend. So, investors have visibility and stability (very uncommon in REITs). 

I have to think RSO is on its way to $10 in short order, because the MLP's I follow (e.g., BBEP) go to less than 10% when their distributions are reinstated and stable. Check the chart on RSO and you will see what I mean about appreciation in the short term.

Exit strategy: I am way over weighted in RSO. When it gets to $10, I will diversify into energy stocks (BBEP), communication (VZ), and some long term spec stocks (VRNM), all intendeded to spread my risk, stablize my income, and provide opportunity for the occasional home run.

The reason I am posting is to ask your opinion of my strategy (should we not be trying to get Buffet style numbers in as short a term as possible) and to ask your opinion about RSO, a stock that seems to fit your criteria and may serve as a great current example.

Good luck and keep posting!

Report this comment
#24) On March 06, 2010 at 6:42 PM, truthisntstupid (83.28) wrote:

exdivvy

I wish you all the luck in the world, but before I could offer any opinion on REITs I'd need to read up more on them.  I have bought and sold several stocks for capital gains this year, but I'm really not into pursuing short-term returns.  It just happened that way this year.  The one analyst following RSO does rate it a buy.   I do need to read up on REITs.  I already have a good book with a good section on REITs (The Ultimate Dividend Playbook).  But, actually, I'm more focused on finding companies I'd like to buy and hold from now on. 

Report this comment
#25) On March 07, 2010 at 1:51 PM, exdivy (< 20) wrote:

Truth,

Thanks for the response.

 I understand your post, I was just trying to put a short-term spin on your strategy. Instead of reading up on REITs, why not just put a few speculative dollars to work in RSO. As you see it unfold (if it does unfold the way I think it should), you may have some special insights into my short-term spin on your long-term strategy.

If you do invest, you will almost certainly not lose any money and will  probably make a nice return - that would be the payoff for looking at my strategy.  You can always invest a little, collect the dividend (exdivy probably during the last week of March), reinvest the divy, and if the price continues to appreciate you could even add a little more for the next dividend. Remember, the CEO has virtually assured investors that the $0.25/quarter dividend is money-good for the year - other REITs do not offer than kind of visibility. You can probably find the CC on SeekingAlpha.

BTW, RSO is not like other REITs. You would have to study RSO to really get a handle on the investment. A quick look at the chart will show that all the stock does is go up.

Of course, when it gets to $10 in a few months, I will need to find another stock that would behave the same way - that is why I would like you to see how this works. The next stock might be a REIT, or it might be a MLP in the oil and gas industry.

Please give it a look - thanks!

 

 

Report this comment
#26) On March 07, 2010 at 2:34 PM, goalie37 (91.45) wrote:

Great article as usual.  I find the problem with most investing strategies used by the commentators on CNBC and most other financial media is that they focus on so few numbers.  95% of them will discuss share price.  Maybe 75% will discuss earnings.  25% will mention revenue.  Beyond that, very little is used...no balance sheet issues, no cash flow statement, dividends, dividend growth, etc.

 Keep up the great posts.  I always enjoy reading them.

Report this comment
#27) On March 07, 2010 at 4:54 PM, truthisntstupid (83.28) wrote:

exdivvy

I'll look at it some more but with a payout ratio of 460%, a P/E listed as N/A and a forward P/E listed as N/A and total dividends paid out in 2007 of $1.64/share,  total dividends paid out in 2008 of $1.62/share,  total dividends paid out in 2009 of $1.29/share,  the fact that it's now down to a dollar and yielding close to 14%  makes me wary of it.   I hope it does well for you, though. 

goalie37

Thank you.  Any more I hardly ever listen to CNBC.  I've even overcome the Cramer thing.  I used to like to watch his show sometimes even though I didn't like his anti-buy-and-hold stance.   I think I've watched it maybe once in two months now.  Just don't need it. 

Report this comment
#28) On March 07, 2010 at 5:45 PM, exdivy (< 20) wrote:

Truth,

That's why I said you just need to buy some. I just want you to keep watching it go up and have the dividends come in to get a feel for what your strategy looks like in the short-term.

The metric of importance is not P/E, but cash flow.

The reason the dividend has dropped to $1.00 for this year is they had a secondary offering that increased the float by 40%. The secondary was "necessary" for them to take advantage of opportunities to buy back notes for pennies on the dollar. I could go into more detail, but I do not want to take aways from the message of your blog, which I think is very important.

Report this comment
#29) On March 08, 2010 at 1:01 PM, djshagggyd (73.78) wrote:

TIS-

I'm sold.

Thanks for the great article! The way you explained your thoughts made a whole lot of sense... even to someone like me who has very limited knowledge and experience. 

In my short history as an investor, I have often been guilty of following the herd, and dividend chasing. But now that I have more knowledge and tools at my disposal, I'm making motions to switch my strategy. I think dividend investment is for me. And over the coming months, I would like to reorganize my portfolio to reflect this decision.

I will definitely be keeping an eye on Dividends4Life, Seeking Alpha, and your blog. I also plan on heading over to the library after work to see if I can pick up some of those books you mentioned.

To follow up on my blog...

My troubles with Conn's appear to be mostly over (knock on wood)... so when the time is right, I will reinvest that money into a quality company with a stable dividend. I have money in several other stocks that I need to reinvest too. It'll be a fun project.

With my first year and a half as an investor now behind me, I can see that I made a lot of mistakes. And I conducted a lot of needlessly dangerous experiments. In my second year, I plan to act much more prudently. Because of you and others here on Fool... I am finally starting to wrap my head around the core concepts behind intelligent investing.

Thanks again for sharing your knowledge... I look forward to reading more of your posts. Have a great week! Report this comment
#30) On March 08, 2010 at 3:07 PM, truthisntstupid (83.28) wrote:

dishagggyd

Thanks for the kind comment.  This blog had been "simmering"  in my mind for some time.  Someday months from now I will rewrite and repost it, because I know I could write it better now and I think this message and this concept deserves my best effort.  Again, thank you!

PS - Want some inspiration?   Look up Todd Wenning's Fool article titled Build A High Yield Portfolio.  If you're attracted to this kind of investing you'll like it.  A lot.

Report this comment
#31) On March 08, 2010 at 3:48 PM, truthisntstupid (83.28) wrote:

http://www.fool.com/investing/dividends-income/2009/03/24/build-a-high-yield-portfolio.aspx?source=isesitlnk0000001&mrr=1.00

This is the article I'm referring to.

Report this comment
#32) On March 09, 2010 at 12:36 PM, djshagggyd (73.78) wrote:

Cool, great article! I also read Daniel's blog... the discussion you guys had on there was really interesting. Thanks for all the info!

Report this comment
#33) On March 09, 2010 at 1:07 PM, truthisntstupid (83.28) wrote:

djshgggyd

In the end I decided to quit arguing with Daniel on his blog and write my own in rebuttal....

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=346141&t=01007007794901831104

Report this comment
#34) On June 01, 2010 at 1:54 PM, TMFBabo (100.00) wrote:

Excellent post.  I talk all the time about small caps and such, but I've capitulated recently and have begun buying up a lot of shares of PG, which I consider the class of the dividend growers. I've even given it my top pick check mark, my only one.

I look at 54 years of 9.5% annualized dividend growth and their low current payout ratio in awe.  9.5% dividend growth over 54 years while maintaining a conservative payout ratio only means one thing: earnings had to have grown at a similar rate as well.  A company that can manage to grow earnings at that rate for that long at that rate is downright impressive.

Every time the dividend for PG grows, I look to it as the company having increased its value by that much (although this often only holds true for dividend aristocrats that increase earnings at the same rate as their dividends). 

I know a company's only as good as the future earnings and dividends.  PG's EPS and dividend growth over the last decade has been better than the historical 9.5% and I see no signs of a slowdown.  In fact, I believe it's better positioned than 10 years ago to continue the impressive streak of EPS and dividend increases.  

Anyway, I look forward to reading more of your posts in the future (it's 3 months later and I see you don't blog often - sheesh).

Report this comment
#35) On August 12, 2010 at 4:30 PM, truthisntstupid (83.28) wrote:

Thanks, BB.

You know, I hadn't looked at this blog in months!  You'll probably never even know I answered you, but...

Let's just say something happened that made me a little less enthusiastic about sharing.  Every now and then I still have something to say, though...

Are you going to wait 3 months before you read this one, too?

http://caps.fool.com/Blogs/valuation-is-overrated/429310

Report this comment
#36) On August 12, 2010 at 5:48 PM, truthisntstupid (83.28) wrote:

Did that sound obnoxious?  I was just kidding!

Report this comment
#37) On August 12, 2010 at 6:12 PM, goalie37 (91.45) wrote:

@ truthisntstupid - I know this isn't a recent blog, and I did reply back when you first posted it, but thanks for bringing it back up on the boards again.  It really does deserve to be read by anyone who missed it the first time.

I wanted to add something from my own experience, specifically buying assets in the hope of future capital gains.  When I was a kid, I was an avid coin collector.  My dad would tell me that if I put those coins away and waited 30 years, I would be able to retire.  Well, I did exactly that.  After sitting in a closet for 30 years, I took my coins to a coin shop and sold them for a whopping $600.

There were two extremely valuable lessons in this for me.  First, in 30 years in the closet I earned exactly zero interest.  Not one cent.  Second, a big part of my abysmal return was that most of my coins were not exceptionally rare or in perfect condition.  If you are going to "buy and hold" an asset, it better be of the highest quality.

Report this comment
#38) On August 12, 2010 at 6:37 PM, truthisntstupid (83.28) wrote:

Thanks, goalie! 

I'm getting more and more of an itch to rewrite it.  I know there are some parts I could write much better the second time.  Think I should soon?

Report this comment
#39) On September 12, 2010 at 3:43 AM, HarryCarysGhost (99.68) wrote:

Wait a minute somthings wrong here-

I wanted to add something from my own experience, specifically buying assets in the hope of future capital gains.  When I was a kid, I was an avid coin collector.  My dad would tell me that if I put those coins away and waited 30 years, I would be able to retire.  Well, I did exactly that.  After sitting in a closet for 30 years, I took my coins to a coin shop and sold them for a whopping $600.

Goalie your missing the point of dividends. (this is where truth and I disagree)

If you had kept those coins and they paid out a 5% yeild though a drip you would have a nice chunck of change. Now If you were able to DCA and Drip all those years your set.

Wanted to add that every day I save all my change. After six months it comes to around $600 so that is money that I can compound over time. If I do the DRIP.

Report this comment
#40) On September 12, 2010 at 6:18 PM, truthisntstupid (83.28) wrote:

msftgev

We have no disagreement.  If I made more money I would let my dividends compound!

Since I don't, and I have no intention of moving or changing jobs, I want to build up my current income.

I like where I live and what I do. No complaints.

Just want more money.

And I know how and where to get it.

Report this comment
#41) On December 09, 2010 at 5:28 PM, mkj1928 (< 20) wrote:

Can you explain this please? = Berkshire's average cost basis in KO is $6.49/share. Does that mean because of stock splits or because he actually bought it at this price back in the day.

 I still get a little confused by how Buffet actually makes money. If he never sells KO than how can he make so much money off of just dividends? I must be confused.

 Thanks for the help. I'm 38 and had to start my life over. I really like dividend investing but I'm still a little confused. 

Mike

Report this comment
#42) On December 09, 2010 at 6:23 PM, truthisntstupid (83.28) wrote:

mkj1928

At the time I wrote this - and I doubt if it's changed - Berkshire owned 200M shares of KO, which in the previous year paid a dividend of $1.64/share, bringing in dividend income of $328M in the previous year.

How about this year?  KO increased its dividend from $1.64/share to $1.76/share, so those 200M shares will bring in $352M in dividends for Berkshire this year, unless Buffet has decreased his stake in KO.

It's all about the dividend growth.

Companies that pay dividends give you income from your shares while you hold them - you get some income from them without having to sell.  You get a check in the mai, usually quarterly.  The quarterly dividend check will be 1/4 of the annual dividend rate times however many shares you own.  Many people reinvest their dividends, and many people simply have their check mailed to them to supplement their income (that's me).

In October of 2009 I decided I wanted to buy Altria stock (MO). At the time I put the check in the mail (I use direct stock purchase plans)  it was paying $1.28/share per year in dividends. 

By the time my check cleared and my purchase went through, they had bumped up the dividend to $1.36/share.  At my cost basis of $18.46/share, I was getting a dividend yield of  7.37%.

In April of 2010, they increased the dividend again - bumping it up to $1.40/share.  At my cost basis of $18.46, now I was getting a dividend yield of 7.58%.

In Oct of 2010, they increased the dividend again - to $1.52 a share.

Now my shares that cost me $18.46 in Oct 2009 are paying me a dividend of 8.23%.  

Needless to say I'm very happy with my shares in Altria, and although I have almost a 33% gain if I sell, selling is the last thing on my mind.

 There is no reason at all to sell right now.  For people that think Altria is only a cigarrete company, I strongly recommend going to MO's quote page and reading all the pitches from the last six or eight months - and pay special attention to dumberthanafool's pitch - especially where he expands on his pitch in the reply section.  It's quite extraordinary.

Anyway, that's off the subject.  I don't know how many stock splits Warren Buffet has held KO through without looking it up.  As for the cost basis information, I probably got it from either The Warren Buffet Way or The Ultimate Dividend Playbook.   Both excellent books, and sure to help anyone interested in dividend growth investing.

Hope that helps, Mike!

 

Report this comment
#43) On January 06, 2011 at 11:31 PM, DavidSobel (< 20) wrote:

You do not have to toss the baby out with the bath water though!  I keep some cash in play on moves if I like an IPO short term.  You never know how the business will be run long term.  I have bought three since october.  BOX is up 44% LEDS is up 64.71% and IPHI is up 80.00%.  I am going to sell soon and pay off Uncle Sam and put the profits in a forever stock.  Then I will try to do it all over again!

Report this comment
#44) On January 07, 2011 at 3:21 AM, truthisntstupid (83.28) wrote:

Sounds like a plan, David!   Which "forever" stocks are looking good to you?  I'm looking at a few, and planning on buying a hundred shares in one of several companies I've recently made a pretty long pitch on.  Probably a (gasp) bank.

Report this comment
#45) On January 07, 2011 at 5:08 AM, ozzfan1317 (79.18) wrote:

I own KO,MKC And NUE

Those are my Forever stocks.

This might sound crazy but I don't have a set investing style I merely Invest in the best good or great companies I think are worth partial ownership. If  I had to describe my style I am either a Garp or PEG investor who will invest without a dividend if its a smaller well run company with large potential upside. Just imo.

Report this comment
#46) On January 07, 2011 at 5:11 AM, ozzfan1317 (79.18) wrote:

My other profile has my real life portfolio I bought Box about 20% or so ago as well.

Report this comment
#47) On January 07, 2011 at 7:53 PM, truthisntstupid (83.28) wrote:

That doesn't sound crazy at all, ozzfan.  I'm a dividend investor both to generate a little extra income, and because if I pick carefully (I put a lot more time into my RL port)  the dividend sort of helps provide a floor under the stock price.

As you can see from my current CAPS score and rating, this stability and safety sacrifices considerable upside in a rising market.

If you have read this article, you also know why I don't care.  

Style preference is an individual thing.  My portfolio would drive some people nuts when the market's climbing like it has been.  But it's doing pretty much exactly what it's supposed to be doing...providing a safe,secure, and growing income.

Since that's my emphasis, it doesn't bother me at all to watch everyone else rake in the gains.  It's my turn to outperform when the market falls.  

 

Report this comment
#48) On February 13, 2011 at 4:30 PM, DavidSobel (< 20) wrote:

I am liking 3M, HTS and any stock that in the short term has to buy beef that has been beefed up ( no pun intended ) on wheat at $10 a bush.  So MCD and its very : (  unhappy meals look like a good bet in the long term.  That beef and pork from the lots have not been priced in to the equation yet but you can bet that all the burger joints will be passing the costs along to the customer.  I can see it now great profits after wheat comes back down to earth and customers who are used to higher burger prices.  I thing the street will like the numbers after the wheat meltdown.  MCD will take a hit for a while so I am saving a bunch of cash to buy it on the cheap.

Report this comment
#49) On May 20, 2011 at 7:12 PM, truthisntstupid (83.28) wrote:

Wow, David.  That sounds pretty shrewd.  Hope that works out well. 

Report this comment

Featured Broker Partners


Advertisement