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sagitarius84 (35.97)

Emotionless Dividend Investing

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October 08, 2009 – Comments (3) | RELATED TICKERS: JNJ , PG , GE

Investors often fall in love with stocks, which are synonymous with innovation, growth and have delivered strong total returns up to a point. It is easy to fall in love with a stock, which everyone else is touting as the next great thing, whose products you use or is one which has made many investors rich.

The main problem with such attitude however is that it could cause investors to throw their carefully researched strategies out of the window and engage in careless speculating. This could cause severe losses of capital over time.
Investors have suffered two major blows over the past decade – the tech stock crash in 2000-2002 and the financial meltdown in 2007-2008. The first occasion was a complete euphoria for anything related to technology or dot coms. College dropouts were selling stock of their money losing eyeballs attracting online ventures in IPOs, which were valued at billions by Mr. Market. Needless to say the tech boom turned into a bust that left millions of investors suffering tremendous losses. Even investors in great companies such as Microsoft (MSFT) and Intel (INTC), which were enjoying double digit revenues and earnings growth even after the meltdown, suffered huge losses because they overpaid for future growth.

The financial meltdown was characterized by investors who were holding on to safe income investments such as Bank of America (BAC), Citigroup (C) and General Electric (GE), which had a long history of consecutive dividend increases. As these stocks began their slide, they cut their distributions and had to take billions in aid from the federal government. Investors who kept a cool head and didn’t chase high yielding stocks blindly, right before they cut their dividends would have saved a lot of precious capital to be used for later.

The point being taken is that entry price paid for stocks does matter. If you mindlessly reinvest dividends or dollar cost average your way into an index fund you would end up paying top dollar for the inflated future income stream from these investments. Thus, having strict entry criteria might prevent you from chasing hot stocks and losing a lot in the process. This entry criteria could also prevent you from investing in companies, simply because you like their brand or your hope that their business would turn up for the better. Even great brands such as Johnson & Johnson (JNJ) or Procter & Gamble (PG) were not good buys when they traded at more than 20 times earnings and yielded only 1% in the early 2000s. There were other companies, which yielded much more than that and traded at lower price to earnings multiples that should have been on investors’ radars. It is better to sit in cash than overpay for stocks and then have to wait for a decade before you start generating any meaningful return on your investments.

One also needs to have a sell policy, which lets you out of a losing position no matter what. When one buys a stock because it pays a stable dividend, it does not make sense for them to hold onto the stock if the company eliminates its streak of 30 consecutive distribution increases while citing the weak economy. When you take the loss, you would start thinking more clearly. If you hope that it would turn better, you would lose money in the process. When Citigroup (C) cut its dividends for the first time on January 15, 2008 the stock closed at $26.94. Investors who sold at the time would have saved themselves from huge losses in the process.

At the end of the day, only the disciplined dividend growth investor who is careful not to overpay for stocks, and has the discipline to sell when some of his criteria are no longer intact, would be able to generate a sufficient income stream for their future needs.

Full Disclosure: Long JNJ and PG

Relevant Articles:

- General Electric (GE) Cuts the Dividend
- Bank of America (BAC) Dividend Analysis
- Reinvest Dividends Selectively
- Dollar Cost Averaging
- When to sell my dividend stocks?

3 Comments – Post Your Own

#1) On October 08, 2009 at 9:30 AM, sagitarius84 (35.97) wrote:

Do you fall "in love" with any stocks for whatever reason? How do you avoid this?

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#2) On October 08, 2009 at 12:47 PM, lemoneater (67.81) wrote:

As a new investor, I try to be very careful to avoid falling "in love" with stocks. Even though I think a company's products are great, for example P.F. Chang, Panera, Cracker Barrel(Insert your favorite restaurant name here) I know that there is more to company profitability and shareholder value than whether I like to eat there! I try to get to know a stock before I fall "in love." ISRG was love at first sight, however; but it wasn't a blind date. There still is a lot to love although they don't have a dividend.

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#3) On October 08, 2009 at 4:36 PM, truthisntstupid (92.29) wrote:

Guilty.  I started investing in March of '08.  Bought HOG (ouch)  because it was a 'magic formula'  stock.  Also bought HOG because of the runup in the dividend.   If someone had bought $100 worth of HOG in 1986 and held it,  it would have been worth $22,000 20 years later.  I was stubborn and held on till just recently.  Mistakes can be valuable, though.  Bet I won't hold on to another loser like that for that long.  I am a dividend investor.  It makes absolutely no sense for me to keep money tied up paying me 1.2% on my money.  Even if they start growing that dividend again I wouldn't be getting a decent return on that money for years!   Still believe it'll be good long-term.  It's just that even after taking my loss and selling, I can take the money I'll get, buy MO, and be receiving a dividend more than six times bigger!  It's more than worth the loss.

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