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« Reader Profile: Mom and Dad | Main | Build a Dividend Growth Stock Portfolio in 4 Easy Steps »

January 22, 2013


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I abandoned index funds for my taxable accounts and moved towards dividend growth investing about two and a half years ago. Overall, my experience has been very positive. My capital appreciation matches that of the S&P500 index and my dividend payouts exceed those of the index.

The downside being that dividend growth investing takes a bit of work. You do have to be committed to doing some research on stocks and there is a bit of a learning curve. I don't think that these are substantial hurdles, but if thy aren't things that you're willing to commit to, stick with index funds.

@My Financial Independence Journey,

I started dividend investing around the same time as you, but I did it for a different reason. I used to seek growth through undervalued stocks and penny stocks. While I was successful at first, this strategy required a lot of time. I find dividend investing less time consuming. It's more work to pick a stock but chances are that you will be holding the same position for years.

@iPhone App,

cash flow is easily generated from a dividend portfolio though as you simply have to manage your payouts to receive money each month. You are right, the dividend payout ratio is one of the most important metric to follow as you want to make sure that the dividend is sustainable.

I'm not a dividend guy but you've done a nice job of explaining the basics of dividend investing. The one thing you maybe didn't highlight is the increased time it would take to manage a portfolio of individual dividend stocks compared to a purely passive index approach.

I do see that you previously spent more time with a former investing strategy, so maybe that is why you didn't consider the time comparison to a purely passive approach.

Thanks for an informative post!

Thanks for the great article! I’ve become a big fan of dividend-paying stocks for pretty much the same reasons you mention above. Companies like Coca Cola that have been increasing their dividend for 50 years are a safe bet to continue that policy for the foreseeable future. They also tend to be a bit less volatile and often come with a moat to protect their market share. I only recently started buying individual dividend stocks (I’m still a believer in index funds too) but the goal is to create a stable stream of income that I can rely on without having to worry about selling shares.

The mathematician inside me is screaming. The article cites an example of gaining 101% in 10 years, and then says that is an average return per year of 10.1%. Ha. That totally ignores the effect of compounding. The real average return per year is 7.23%.

To piggy back on top of what Paul said, the citation of the dividend yield based on the money invested 10 years ago of 4.64% and then saying that in 10 years the yield could be over 10% is the same problem. This is about a 9% annualized increase in the dividend. So if you continue with that same 9% every year what do the numbers look like if you keep reporting things based on your initial investment. After 20 years the yield is 11%, after 30 years the yield is 27%, after 40 years the yield is 63%, after 50 years the dividend yield is 149%, after 100 years the dividend yield on the original investment is 11 thousand percent.

To show what happens when you report average yields rather than compounded yields. In this example if the stock returned the same annualized yield every year for 20 years the average yield would be 15%, for 30 years the average yield would be 24%, for 100 years the average yield would be 1,075%. But yet the compounded annualized yield would be the same 7.23%

Does it make any sense to report yields and returns like this? No it does not. It misleads people into believing the numbers are better than they are. This works because the time frames used here are only a decade so the increases in returns are small enough that the returns seem just pretty good rather than excessive. But when you take this means of reporting returns out into long time periods the large mathematical mistake becomes apparent.

Please do not report returns like this. Your intro says you are an MBA so you know this is not a valid way to report returns. The article and your argument has merit. Why detract from that by using misleading statistics to embellish the point?

@ Paul and Apex,

I've mentioned in the article that I've used average return and not annualized. However, you are right that it's more important to publish the annualized return than average. I should have reported it differently. Sorry about that!

Thanks for explaining this. I am definitely going to check into dividend investing. I always learn good info from you!

Dividend paying stocks are great and signing up to a companies Dividend Reinvestment Plan (DRIP) is a great way to reinvest those dividends into the stock usually at minimal to no cost.

Most dividend paying stocks have DRIPS.

I automatically reinvest my dividends and I have been investing in individual stocks for almost a year now.

I don't know why more people aren't interested in dividends and why everyone is in to high fee mutual funds.

If I can begin to learn this stuff then anyone can. I had considered buying Coke before Christmas but I ended up with some more shares of a good Canadian bank.

I guess I'm the lone exception in this discourse on the merits of buying stocks with above average dividends.
I retired in 9/1992 at the age of 58 and by 12/28/92 had consolidated all of our investments at Fidelity where they have been ever since.

Period 12/28/92 - 3/10/2000 ..... My Ann=38.51% ...... VFINX Ann=19.78%
1993 was a great year to be in emerging market mutual funds then when the the bubble started taking over the place to be was aggressive growth mutual funds until they peaked in March 2000.

Period 3/10/2000 - 12/1/2008 ..... My Ann = +6.64% ...... VFINX Ann = -4.41%
This was a period to focus on capital preservation and to avoid stockmarket volatility. I went in and out of Junk bond mutual funds most of the time.

Period 12/1/2008 - 1/18/2013 ..... My Ann = +5.06% ..... VFINX Ann = +18.08%
By this time I was at the age where I wanted to be in the slow lane so I moved into laddered muni bonds in our taxable account and laddered corporate bonds and CDs in our IRAs.

Total period 12/28/92 - 1/18/2013 ..... My Ann = +16.81% ..... VFINX Ann = 8.29%
Total gain 12/28/92 - 1/18/2013 ..... My Gain = +2153.29% ..... VFINX Gain = 393.49%

During this 20+ year period I have never owned any individual stocks, I have never had a losing year and outgained Vanguard's S&P500 index fund by a factor of almost 5.5. However I am the first to agree that periods like January 1993 - March 2000 are very rare, though most investors did not get out when the Nasdaq crashed in March 2000.

Definitely, Dividend Investing is the best investing in stock market. I also prefer it and due to this I invested in Coca-Cola (KO). However, I did not get more dividend because I have few share of it. I am familiar with four dividend growth stocks that you picked to compare but Chevron (CVX) is new for me.

What's your opinion of "Dividend Achiever" etfs like PEY and PFM?

How does this compare with a low-cost fund that focuses on Dividend appreciation (i.e. Vanguard Dividend Appreciation Index Fund Investor Shares (VDAIX))?

Dividend investing is the way to go. It as cool as day trading, but you will win in the long run. Great advice, thanks for sharing this information!

Great article. Numerous studies show dividends comprise about 60% of the stock market's returns over long periods. I like the ETF products based on the Dividend Aristrocrats - companies that have raised dividends for 25 years in a row or longer. Wisdom Tree also has several ETFs based on dividends.

Of course, you can certainly buy individual stocks, but this requires more work and adds an extra layer of risk to buying a diversified ETF or index fund.

VDAIX may sound pretty good when you look at its goals but in the short period from 10/9/07 to 3/9/09 it still had a loss of 46.69%. On the other hand it provides far more diversification than holding a handful of stocks, and as we all know even the best of companies can come up with a big earnings miss which will send it down like a rock even though it may be paying a decent dividend. Stocks can also cut their dividends if they have a poor earnings report which will also send their price down. Unlike owning bonds, in the case of stocks and mutual funds you have no such thing as getting your money back at some future date.

In the years when I was using stockmarket mutual funds(1993-2007) I liked to do my best to avoid the bad periods and there are many indicators that can do that. My software could generate and plot the (New Highs - New Lows) and (Up Volume - Down Volume) summation indexes for both the NYSE and the NASDAQ, all four indicators gave very clear sell signals by the end of 2007 and would have avoided the big decline of 2008. By the 3rd. week of July 2009, all four indicators were giving buy signals.

In my own case after getting out of the stockmarket when I did I was also at the age, and in the financial position, where unlike stocks, I found muni amd corporate bonds more to my liking since they pay dividends twice/year, have very low volatility, have tax advantages and are not bought for capital gains. They also give you your money back when they mature - qualities that are very appealing when you start getting into your seventies and no longer have the stomach for gambling.

If you are a long term investor and want stability with your returns than do market research and track the stocks who is in your portfolio that way you can minimize risk frequency.

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