Focused Dividend Investing: Pros and Cons

I believe that diversification is the only free lunch in investing. However, different investors have different takes on the topic of diversification. Some claim that it makes sense to only invest in their best ideas. I will try to discuss the pros and cons on the focused approach. At the end, I will talk to you about my take on the situation.

Focused Investing Pros:

1) If you purchase a great company, which is a successful investment, it will help your portfolio a lot if you are overweight in it. For example, if you invested everything in Wal-Mart when it became a dividend achiever in 1984, you would have done much better than the average investor out there.

2) It helps the investor really focus on a select number of companies and learn everything there is to those companies. If you have a substantial amount of money in a few stocks, you will monitor them very closely, and you will be intimately more familiar with them.

3) It is easier to track 20 companies, than track 50 or more. In addition, the investors could learn more information per investment when they focus on about twenty companies, than when they focus on 50 companies.

4) If you have great ideas, you should put most money there. If you have a few great ideas over your lifetime, and you put a large portion of networth to them, the wealth building effect to your bottom line would be tremendous.

5) Some of the best investors such as Warren Buffett, Charlie Munger have made a majority of their money from just a small number of concentrated bets throughout their career. We have all heard about the time when Warren Buffett put 40% of his partnership in American Express (AXP) in 1964, and made millions of dollars.

3 Low Volatility Dividend Stocks To Make Staying The Course Easier

This is a guest post written by Ben Reynolds at Sure Dividend.  Sure Dividend helps individual investors build high quality dividend growth portfolios from Dividend Aristocrats and other dividend stocks with long histories.

The article Dividend Growth Investors: Stay The Course thoughtfully examines the difficulties of investing in dividend growth stocks when stock prices are falling. 

The article discusses how important it is to stay the course and continue building your dividend growth portfolio – even when prices are falling.  See below for an excerpt:

“There is a reason why stocks have done much better than bonds in the long-run – they are riskier. With stocks, there is always the chance that there will be violent fluctuations in the price. You can have steep downturns, which can have many weak hands scrambling for the exits. When stock prices go down, many investors assume that something is wrong, they panic and sell. They forget that your upside potential in terms of dividends and capital gains is virtually unlimited.”

The volatility of dividend stocks is what makes staying the course more difficult.  The larger the price fluctuations, the harder it is to hold onto a stock.

Think of investing in dividend growth stocks like bull riding.  The longer you stay on, the better off you will be.  It’s easier to ride a placid bull than an enraged one.  The same is true of dividend stocks.  Some have wild price fluctuations that threaten to ‘buck off’ investors who are unable to stomach large losses.  Other stocks make for an easier ride – they have lower stock price volatility.

This article takes a look at 3 of the lowest volatility non-utility dividend growth stocks around to make your dividend growth journey as smooth as possible.

How to Earn $95,000 in Qualified Dividend Income, and pay no taxes

There are two certainties in life – death and taxes. Every April, we have to file a tax return with the Federal government and pay our taxes due. Whenever I do my tax return, I always come up with the same conclusion: The US tax code is set up in a way, that it encourages investing, and discourages working for money.

For example, qualified dividends are taxed at an effective rate of zero percent for those individuals who are in the 15% tax bracket. The 2015 tax brackets for a couple that is married and filling jointly is posted below (Source: IRS.com):

Taxable Income	Tax Rate
$0 to $18,450	10%
$18,451 to $74,900	$1,845.00 plus 15% of the amount over $18,450
$74,901 to $151,200	$10,312.50 plus 25% of the amount over $74,900
$151,201 to $230,450	$29,387.50 plus 28% of the amount over $151,200
$230,451 to $411,500	$51,577.50 plus 33% of the amount over $230,450
$411,501 to $464,850	$111,324.00 plus 35% of the amount over $411,500
$464,851 or more	$129,996.50 plus 39.6% of the amount over $464,850

This is the 2015 tax bracket for a single individual (Source: IRS.com):

Focus on Dividend Growth In conjunction with Dividend Yield

Dividend Growth Investing is a strategy where an investor acquires shares in a company that has a track record of regular annual dividend increases. Only companies that have a certain type of business model can afford to grow dividends every single year for at least a decade. A track record of so many years of dividend hikes serves as a mechanism that narrows down the list of candidates for further research. In a large portion of cases I study, I am finding that companies have managed to boost dividends for at least a decade, because they also grew their earnings.

In my strategy, I look for companies that have raised dividends for at least ten years in a row. I also add things like P/E, yield requirements and growth requirements. If you have read my stock analyses before, you would note that I also look in trends in earnings per share, dividends per share, dividend payout ratios, as I gauge stability of the business, the dividend and try to make an educated guess whether the good times can continue on.

How can companies increase annual dividends by hiking them every two years?

One of the best things to come out of writing this site for the past 8 years is the ability to connect with others who may share similar goals and interests with me. The best part is questions I receive from readers. Many times, those questions provide fuel for future blog posts or turn into blog posts themselves. My biggest problem is that if everyone of my readers were to ask me a question per day, I would end up with enough blog content to last for the next 20 – 30 years.

A reader asked me the following question, after reading my post on slowing dividend growth:

"I was wondering how a company could have 53 consecutive annual dividend increase and yet go close to 30 months between raises? ( as is the case with CL between 83 and 84, among other dates as well)"

This is a good question. The best way to answer it, is to look at actual data. Actually, breaking down the data could be helpful. Most companies in the US pay dividends every quarter, with some exceptions. Therefore, the typical dividend growth company such as Colgate-Palmolive (CL) would pay dividends four times per year.

24 Dividend Champions for Further Research

The list of dividend champions is the most complete list of US dividend stocks that have managed to boost dividends for 25 years in a row. David Fish painstakingly maintains this list, and spends many hours each month on this very useful tool for dividend growth investors. As a side bonus, his list also includes dividend contenders (those which have increased dividends for 10 to 24 years) and dividend challengers ( those which have increased dividends for 5 to 9 years in a row).

I applied the following entry criteria on the list of dividend champions:

1) Dividend yield higher than 2%
2) 1,3, 5 and 10 year dividend growth of at least 5%/year
3) Dividend payout ratio of less than 60%
4) Dividends Increasing for at least 25 years in a row ( dividend champions)

I then went ahead, and reviewed the growth in earnings over the past decade. I wanted to eliminate companies which were not able to boost profitability over the past decade. Without growing profits, a company’s ability to boost distributions is severely limited.

What should I do about slowing dividend growth?

In the past week, two of my holdings raised their quarterly dividends. Unfortunately, those dividend increases were pretty pathetic. I evaluated each of them, to determine what to do in this situation.

Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and sells consumer products worldwide. It operates through two segments: Oral, Personal and Home Care; and Pet Nutrition. The company announced a 2.60% increase in its quarterly dividend to 39 cents/share. This marked the 53rd consecutive annual dividend increase for this dividend king. The company has managed to increase annual dividends at a rate of 10.50%/year over the past decade.

I looked at previous dividend increases since 1977 for Colgate-Palmolive, in order to put the latest dividend increase in perspective. I noticed that in 1980, the company had a 3.70% dividend raise, after keeping distributions unchanged for over an year and a half. Throughout most of the 1980s, Colgate-Palmolive maintained a rate of slow dividend growth, particularly as it increased quarterly dividends every two years. Due to the fact that the dividend increase always occurred on the last quarter of the first year after the raise, the company still managed to boost annual dividends paid to shareholders, despite the fact that the quarterly dividend was actually hiked every two years. The slow dividend growth in the 1980s was driven by slow earnings growth at the time.

Give your investments time to compound

The most important ingredients for success in investment is initial capital outlay at a favorable valuation, annual return and time. Many times investors are able to identify a good company, which has the potential to grow earnings and dividends over time, and reward them handsomely in the process. For example, a business like Diageo (DEO) is a quality one, which is attractively valued today. I believe that it would still be selling premium alcoholic beverages throughout the world twenty years from now. I also believe that this business will be able to earn more over time, and pay a higher dividend twenty years from now. It is quite possible that the higher earnings per share will make the business itself more valuable as well.

The problem is that the investor bails out because either the stock price goes down, it stays flat, or they sell because of the fallacy that nobody goes broke taking a profit. The other silly reason why people sell is because they get scared by rumors and speculation, that makes them get irrational and emotional, and thus they bail out. If you believe that people will be willing to exchange their hard earned money for a good beverage in 2036, then chances are that Diageo (DEO) might be of interest for further analysis.

Five Dividend Growth Investing Lessons I Have Learned Over the Years

The analysis of my past investments from 2008 to now has shown a few interesting lessons. The first is that I do not know which companies will be the best ones to own in the future, in advance. I can look at earnings per share and dividends per share trends, but in reality, noone can predict the future perfectly. Based on past experience, I can only deduce that a diversified portfolio of quality dividend growth stocks should do fine over a long period of time.

The second lesson is that I should not sell stocks merely because they have risen in price. I know I talked a lot about this before. The main reason is that I made this mistake by identifying and purchasing small stakes in companies like Sherwin-Williams (SHW), W.W. Grainger (GWW) and RPM International (RPM) in late 2008 and early 2009, yet I never added to those positions later on. The reason was because they were always slightly overvalued per my yield requirements. In addition, I also ended up selling those stakes a few years later, which in hindsight was not a great move. I ended up buying companies high higher current yields, which still did great, but not as great as the original companies.

What dividend cuts? What market correction?

The beginning of this year was characterized with a correction in stock markets around the world. The big problem has been the energy sector, which has dragged down returns for investors. Some like myself have experienced dividend cuts in the likes of Kinder Morgan (KMI) and ConocoPhillips (COP). Others, have experienced dividend cuts in the likes of BHP Billiton (BBL). It is obvious that the energy sector is having a tough time, which by default translates into companies that do business in the energy field, their suppliers, their bankers and certain economies will experience turbulence as a result of this downturn.

As a somewhat visible private investor, I receive a lot of hate mail where the sender of the message secretly gloats at what they perceive to be my current misfortune. Unfortunately, their gloating cannot be further away from the truth. The sender ignores the following important facts when sending me hate mail: