Monday, February 2, 2015

Getting Started with Dividend Stocks - Part I

Hello, I am Div4son

On August 2014, I started thinking about dividend growth stocks investment for future income and growth of my portfolio (which is mostly in my 401k, IRA etc).

I took the following steps:

1) Acquire Knowledge
2) Develop Strategy
3) Execute the Plan Tactically
4) Repeat and refine

Hopefully, this would be useful to the new investor. Step 4 is important since it is impossible to know everything. Moreover, the economical climate will change. Your plans may change.



Acquiring Knowledge

You must first understand yourself first. Investing is not for everyone. You must know your risk tolerances. You need to consider how much time and effort (and fun) you'll need to read/research/monitor.
Most importantly, you need to know the risks. If you can't sleep well at night due to your investments, then investing is probably a bad thing. Investing in mutual funds & ETFs are perfectly acceptable if you are comfortable with them. Others may invest in the bonds and real estate.
Also, it is important to understand what you are looking for. Understand that with dividend stock investing, you're focusing on growth of your dividend income, and that your principle will go up and down - sometimes quite significantly (Up 50+% downside). The income can then be used for whatever you want. You can reinvest or you can live your life's desires.
So, you need to determine your timeline, your required income and then you can create a plan to meet your goals.

Again, your plans may change, and you may need to change your strategy to accommodate.

After you have a good picture of what you want, and know your risk tolerance, then you have to start reading. I am constantly reading. Here are some books which I recommend:

Single Best Investment by Lowell Miller


This is required reading if you want to invest in dividend stocks. The key message from this book:

High Quality + High Current Dividend + High Dividend Growth = SBI stock

The best dividend growth stocks combine quality, growth, reasonable valuations, financial strength and price momentum. There is also a message on 'reasonable' valuation. We all want to buy low and sell high - but who knows if a stock is low and is considered good value. However, the book does provide some indications on 'good' value, and in particular if it meets the story. e.g. Low P/E compared with its peers, low P/B and low P/S compared with the market etc, in addition to some interesting trend analysis using relative strength. Also, recurring theme with other books is the low payout ratio < 60%, low debt etc, good credit rating as an indication of quality.

The Ultimate Dividend Playbook by Josh Peters


This is the first dividend stock investment book I read, and it convinced me that dividend growth investing is for me. This book describes the basics of dividend investing, growth of dividend, how to value stocks using Dividend Drill & Gordon growth methods, and when to sell (when the dividend is cut). There are some solid examples to follow and understand. I would recommend this book for the newbie.

Dividends Still Don't Lie by Kelley Wright

Dividends Still Don't Lie is the follow-up edition of the original Dividends Don't Lie book from a while ago. There are a lot of examples. My key take away is the Dividend Yield Theory - which tells you when to buy (at historical high yield) and to sell (at historical low yield). Since my strategy is buy and hold as long as possible, I will use only part of the theory. The main drawback of the Dividend Yield Theory is that it is based on historical information. Moreover, the "Yield Profile" - i.e. High and Lows yield value lines can change over time. Another difficulty is the work to look back over the last 10 years to plot the high and low value lines. (I am sure that there are charting sites that will do this for you!). However, over the Christmas break, I created my own version on Google Sheets - which I will share in future updates.

As a summary, using the yield and price information (example is Proctor & Gamble). You can 'estimate' the high & low yields of a stock historically (over 10 years).


From this information, you can see the high close to 3.7% yield, and lows at 1.90%. I chose a slightly higher low (2.2%) since the data prior to the Great Recession can be misleading, This is where the theory can be subjective.

Plotting the High & Low Yield values for the years, you can see that boundaries the of high & low prices.


The key is to buy at the 10% within High Yield (red line) and sell at the 10% within Low Yield (yellow line).

However, for me, my plan to sell is different. I do want to buy a stock if it is good value. So, I created a green line which is the middle point. Often, when I look at analyses of intrinsic value (from others and also from my own sources), I see there is a close relationship between my green line value and the intrinsic value. Therefore, for high quality companies, I am open to buy if a stock is in between the green and yellow lines.

Of course, it is possible for the stock to go beyond the lines - but your downside risk is reduced.

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The main takeaway from all the books is that dividend investment is not difficult. Using Lowell's formula and understanding when a good entry point to buy is key. You hold until the dividends tell you to -- e.g. when they are cut (dividends don't lie!)

Lastly, the internet is a greatest resource out there. There are a lot of quality blogs. I suggest you should read the blogs of others, and with the knowledge from all the books, you should have a good idea on the strategy.

Okay - that's all for part I. In part II, I will spend some time describing my strategy. As a summary, it will be based on the ideas from the above books, and from bloggers etc.

    Disclosure: hope to be long PG if the yield and fundamentals are in line. 




6 comments:

  1. I am familiar with two of three books you mention. I wonder if "Dividends Still Don't Lie" is worth a read too. Happy to see another fellow join the dividend growth investing world. It's amazing to see how much this space has grown over just the last year or so since I started my own blog. Thanks for sharing.

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  2. Keith, Thanks for your comments. The main thing I learned from "Dividends Still Don't Lie" is the dividend yield theory which I can using to determine when I buy. The books in general follow similar trends - e.g. buy good quality companies, low payout ratios etc.
    As for the blogging space, I agree that this has grown. Overall, this is a good thing with lots of good ideas being shared and discussed.
    Div4Son

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  3. I've read all three books and they're great. You might want to take a look at Lazy Investor by Derek Foster.

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    1. Thanks Tawcan. I will read the lazy investor. I agree with you that these books are a great resource.
      Div4son

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  4. I've never gotten my hands on Dividends Still Don't Lie, although I like to buy my books at Half Price Books because I don't want to pay retail for them. SGI was great and I'm still working my way through TUDP. I left it at home and so I started reading other books instead. I need to make sure that I get that back to the top of my reading list for when I finish my current book.

    The key with DGI is patience. It's not a get rich quick method of investing but it's a slow and steady process. Come up with your own investing rules and be sure to read as much as you can between books, blogs, and Seeking Alpha. There's an absolutely amazing amount of information available on DGI. I think it's the most straightforward method of investing and just makes the most sense to me.

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    1. Pip,
      I completely agree with being patient with DGI. Actually, your comment gave me an idea to write about in the next article.
      Div4son

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