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August 23, 2013 – Comments (2)

Board: Dividend Growth Investing

Author: kelbon

There's so much buzz on the boards, and elsewhere, that the market is at a top and primed for a fall; perhaps 20% or more. This view is so prevalent it feels almost preordained. The wisdom of crowds perhaps?

Markets, however, don't usually move based on common consensus. If they did there would be an orderly queue of people getting in, and out, in a tidy fashion, getting richer in the process.

Significant market contractions take most people by surprise, as if they came out of left field, and, some of them do. 9/11 for instance.

Although there are good reasons to think that the market might pullback significantly before the end of the year, it's far from necessarily so. But, if I had to bet on either 20% up, or 20% down, I'd place my money on “the market down 20%” bet. Fortunately, no one is twisting my arm, or anybody else’s.

It’s reasonable to say “You simply don’t buy the top of the market or an overvalued market.” if you are buying the market; that is, a S&P 500 index fund, for example. (Unfortunately, market tops are only visible in the rear view mirror.) But, the "market" is a conglomerate. Saying the market is overpriced is like saying the population is overweight. On aggregate both may be true, but if you look hard enough you will see some trim people walking about, and, there are stocks with reasonable valuations and reasonable dividend yields in sight too. Bargains? Few and far between certainly, but, good companies selling at reasonable prices; there are probably a few.

If I was sitting on 100% cash I wouldn't be worried about prudently picking up a few reasonably priced dividend yielding stocks at this juncture, provided I was prepared to be sanguine if, and when, the market contracted —if you can’t stomach seeing stock prices significantly below what you paid, you shouldn’t be investing in stocks in the first place. No, I’d be more worried about still sitting on 100% cash five years from now because market conditions were never quite right to put a toe in the water; the market didn’t pullback quite enough.

I think that probably most people focus on time frames that are too short; too looming. It's likely more sensible, to think about what a company with reasonably predictable earnings—say Procter & Gamble, for example—is going to look like in five; ten years. Their earnings will almost certainly be higher and, (almost certainly too), the dividend will have been increased at, or greater than, the rate of inflation.

It’s often forgotten, or bushed aside, that historically a significant percentage of stocks’ positive returns were from dividends.

Back to our example of Procter & Gamble. What’s the worse that could happen if the price of the stock had not risen one cent from today’s price five years from now? First, earnings per share will likely to higher and, ergo, the stock will be more attractively priced; primed for that to be recognized by the market. Second, you will have been banking, or reinvesting, dividends over the interim and the yield on your investment, accounting for dividend increases, will certainly be higher than the 3% you originally paid for just from dividends alone.

As bond yields are anemic and the price of bonds can only go down as yields rise, other than waiting it out (with all the inherent risks involved with that), what is there, for a prudent and conservative investor, that makes rational sense other than investing at least a portion of net worth in dividend yielding stocks that are not demonstratively overpriced?


2 Comments – Post Your Own

#1) On August 23, 2013 at 3:29 PM, constructive (99.96) wrote:

It seemed like everyone in the previous DGI thread missed the fact that someone with a 100% cash allocation is probably not capable of building an individual stock portfolio and sticking to it. They should probably buy a balanced stock/bond fund.

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#2) On August 23, 2013 at 3:32 PM, constructive (99.96) wrote:

Or even better a target date fund.

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