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    Four years ago, I bought this blog. This was my first move towards dividend investing. I started investing back in 2003 but my first dividend stock was bought in 2010. Over the past four years, I’ve worked on building my own investing philosophy (you can read about it here). My investing model didn’t appear overnight and it was the result of a long process.

     

    What I really like about investing is that you are never done learning. There is always a new situation that will generate new results in your portfolio. After four years of dividend investing, here are the most important investment lessons I’ve learned:

     

    #1 I Love Receiving Money in my Account

    I guess the biggest difference between dividend investing and all other strategies is the fact that each month; my cash account grows bigger. Receiving dividend payouts each month is a great feeling. Since I don’t lose any time tracking my dividend dates, I sometimes open my brokerage account and find $20, $50 and up to $171 once! Since 2010, my dividend payouts have never stopped growing:

    dividend payout

    In 2014, I expect to receive almost $1,500 in dividends on a $50,000 portfolio. This equals a 3% yield. It is a modest amount so far, but it will greatly increase over the years to come. It took me two years to make the full transition from my previous positions to a 100% dividend portfolio this is why the yield is still relatively low.

    Besides the fact that it’s fun to receive money each month, I also appreciate this extra cash flow so I can buy more stocks. I usually build my dividend payouts up to $500 to buy an index fund and wait until I have about 10% of my portfolio available to buy another position. For example, I’m now waiting for my annual RRSP contribution of $5,000 in January to buy my next stock. I will definitely add all remaining cash in my account to this transaction.

     

    #2 It’s Easier to Follow Dividend Stocks

    I used to trade heavily on oil and other resources stocks. There is a lot of money to be made in these fields but it also requires several hours of work and daily check-ups. I still spend several hours before buying a dividend stock, but once it’s added to my portfolio, I don’t have to check my position every day… not even every week!

    When you buy a dividend stock, you usually buy a sound & healthy companies. Therefore, following quarterly results is usually more than enough to make sure one stock doesn’t slip through the cracks and start rotting.

     

    #3 Don’t Chase High Yield

    I recently wrote a case against high dividend yield but I must admit I learned my lesson the hard way. I bought a covered call ETF back in 2011 (ZWB). ZWB is a covered call ETF that follows the six Canadian banks. Over about a year, I lost almost 9% on that trade. Mind you, when I bought ZWB, the dividend yield was… roughly 10%.

    Today, the ETF is up 15% since its inception in 2011, while the worst bank during this period is CIBC (CM) at +23% and the best are TD (+54%) and NA (+50%). Plus, the ETF now pays *only* 4.61%.

    The lesson to learn from this is that high yield investments always carry limited growth potential and/or higher risk.There is a reason why you get a higher yield and it’s not because Santa Claus exists!

     

    #4 Dividend Growth is better than Trading Regularly

    One of the reasons why I switched to dividend investing was to reduce the time required to manage my portfolio without affecting its performance. It turned out that I’ve improved my performance and reduced the time spent managing my stocks.

    But I had to face my old demons; a part of me wanted to trade more and use capital gains to buy other companies. The best part about dividend investing is you don’t always need to sell your stocks to benefit from growth; the dividend payout increases too!

    When I bought Telus (TSE:T) back in 2011, the dividend paid was $0.26 per quarter per share. Now the current dividend is $0.38 per quarter per share. That’s a 46% increase over just 3 years! I could have sold the stock and cashed out a healthy profit, but the truth is that Telus pays a 5.6% dividend yield based on my cost of purchase. In a few years, I’ll be able to add a new position to my portfolio only by cumulating the dividend payouts. This means I won’t have to dip into my pocket to grow my portfolio!

     

    #5 Yield Doesn’t Matter if you Select the right pick

    At first, I used to select only companies paying over 3% in yield. It was my way of identifying “good dividend stocks” amongst other factors. I used to ignore lower yielding companies because they were simply not good enough for me.

    I quickly made my first exception and selected Coca-Cola (KO) at 2.75%. I knew KO’s dividend would reach over 3% in a heartbeat due to its dividend growth policy. It did and I was encouraged to dig further into similar yielding companies.

    The truth is that I found several gems among low dividend yield stocks. Among them, I bought Disney (DIS) with a 1% dividend yield now showing a +40.18% in my portfolio. I also bought Apple (AAPL ) with a 2.25% yield (back then) now showing + 39.96%. More recently, I bought Gluskin & Sheff (TSE:GS) at 2.50%. The stock is already +11% before dividend payments this year. The dividend yield is not the most important metric when you select a dividend stock. Instead, I look for companies with the ability to increase its payout consecutively for the next 10 years and beyond.

     

    #6 Patience is the Most Important Investor’s Asset

    During these four years, I’ve bought several stocks that didn’t go into the green right away. In fact, both Chevron (CVX) and Johnson & Johnson (JNJ) stagnated a while before I realized any profits. I bought JNJ when there were quality control issues causing important expenses. Let’s just say there wasn’t any hype around the company at that time.

     

    But since then, JNJ has soared boosted by great results in 2013 and 2014. Sometimes you get lucky and your stock keeps going up the minute you buy it. But most of the time, the result of your trade is not instantaneous. On the other hand, patient investors will receive their rewards sooner or later.

     

    I’m excited to finish 2014 with my current portfolio as things are going very well for me right now. I also know that will learn a lot more in the upcoming years as it will be interesting to see how my portfolio will react to a bear market although I don’t think we will see it any time soon.  I’m not stupid either; there’s always a drop in the market after such a boom.

     

    Tell me, what have you learned from dividend investing in the current bullish market?

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    The market is too high, it has to go down…

     

    I bet you have heard this more than a few times recently. Some investment gurus came out of their tombs and are back with their favorite REM song: “This is the End of the World as we Know it”. They had to hide for a few years after telling the world that 2008 marked the death of capitalism. Six year after the biggest financial crisis, it seems it was just like a bad dream and everything is back on track. But some people will tell you it’s impossible for the market to go up forever. They are right, there will be corrections, but it doesn’t mean the system will collapse this time.

     

    Are We Really Paying Too Much for Stocks?

     

    This is the right question you should ask yourself; are you paying too much for your next trade? I recently increased my position in Johnson & Johnson (JNJ) even if the current P/E ratio was over 19.

     

    Truth is if I had waited a few weeks, I could have bought it a few dollars cheaper (the stock lost 5% in 5 days after posting great financial results). But that’s easy to say when you are playing Monday morning quarterback on your trades.

     

    The real truth is Johnson & Johnson is a great company. The dividend will continue to rise in the upcoming years and the stock will continue to show growth. New drugs will be marketed and profits will continue to grow. This is why there isn’t a perfect time to buy JNJ, but there is a perfect trade to make: buying the darn stock.

     

    I don’t mind the exact timing of my trade for that reason: I focus on buying a company that will grow in the future. The price may be slightly high, but I don’t mind because it will continue to rise. Waiting for the perfect dip never served me. If you have a technique for that, please let me know.

    How About the Market Average P/E Ratio?

     

    Now back to our gurus saying the market will crash because it is overvalued. I like when I read such things as I always wonder where they get the numbers to back their prophecies (if they back it up with anything at all!).

    The following chart shows you the average P/E ratio of the S&P500 according to two important economic metrics: the strength of USD and the strength of inflation.

     

    Average P/E Ratio

      Low Inflation High Inflation
    Weak USD 15.2 13.6
    Strong USD 16.4 13.9

     

    As you can see, the moment where stocks are at their peak in terms of valuation is when there is a strong dollar and a low inflation. Does that ring a bell? The USD is getting stronger as its economic environment improves. Inflation is still very low and under control. Therefore, the historical average of the S&P 500 PE Ratio should be around 16.4. We currently show a P/E ratio of 15.7. What does this tell me? There is still room for the market to grow!

     

    What I like even more is the fact that the market has been up this year not because we have changed PE multiples, but because companies make more profit now that they were making a year ago.

     

    This is exactly what we are looking for: companies increasing their sales and increasing their profits.

     

    This is why I’m buying more JNJ and this is why I’m 100% invested; because I believe the company I own in my portfolio will continue to generate profits.

     

    When you look at the overall P/E ratio valuation, most bubbles burst when the S&P 500 reaches high levels of 20 to 22. We are definitely far away from that. And if it ever goes to this level, I’ll be the first to tell you ;-). In the meantime, I’ll keep buying… and buying… and buying…

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    After the amazing ride we had in 2013, many investors have decided to sell a part of their portfolio and cash out their profits. They did this because they are waiting for the next dip to buy again. The problem is that since the small dip of 5% (where those guys were probably still waiting hoping it would hit 10%), the market is surfing on another good year.

     

    We still have a little bit of volatility, but overall, both the Canadian and US markets are set on cruise control to finish over +10%. However, this scenario will happen only if the good news keeps coming in. You know, the type of news that makes me want to buy more stocks…because this is what you should do: keep buying more stocks if you have money parked somewhere.

     

    The P/E Ratio is not that Bad

    I agree with you, the easy money is gone for good. There aren’t awesome buying opportunities these days on the market. But it doesn’t mean there aren’t opportunities at all. Both the S&P500 and TSX60 are traded around their historical average values for P/E (16-17). Therefore, most stocks are currently fairly valued.

     

    This also means that if companies keep posting better results, their stocks will continue to rise and follow the same ratio. In fact, this is pretty much what has happened since the beginning of the year. Stocks are following alongside their profits and this is a very good thing for everybody; this means there is not a bubble ready to burst.

     

    Companies Still Have Cash

    For the most part, companies have never kept this much in liquid assets as they do nowadays. They have focused on paying down their debts and reducing their costs over the past 5 years and have kept a very tight budget.

     

    What does extra cash mean for investors? One of these five things:

    #1 Dividend increases

    #2 Stock buybacks

    #3 Mergers & Acquisitions

    #4 Additional investments in R&D to innovate

    #5 The ability to endure a rough stretch (recession)

     

    When I increased my position in Apple (AAPl) a few weeks ago, I bought a company that is sitting on billions. This money is ready to be redistributed to me as an investor through many channels. I would rather buy shares now and keep their dividend in the meantime instead of waiting on the sideline earning 1% from the money market.

     

    The Train is Still Not Steaming

     

    As I’ve previously mentioned, I don’t see the stock market train steaming yet. In the US, there isn’t a big bubble ready to burst. The housing market is growing slowly, consumers’ confidence is rising and employment is getting better. The deleveraging phase is over and consumers have started to buy goods again.

     

    In Canada, the housing market still worries me but it seems that we are landing softly on a zero growth level (eventually) without any crashes.  Mind you, banks are well capitalized and it will not affect their balance sheet too much as profits now come various sources apart from mortgages.

     

    What is Expensive Today will be out of Range Later

     

    If you think the market is expensive right now, you might not be in a good position to manage your portfolio. I’ve talked to people who told me the market would burst last year while others told me the same thing about 2012. Still, we are now past the mid-year of 2014 and the stock market continues to grow.

     

    At the moment, there are plenty of good reasons why stocks are going up. I’m not saying that everything is perfect (far from it), but there are enough factors telling me price will keep going up. What do you prefer; not buying right now, missing the dividend to buy in maybe 2-3 years at today’s price after the stock market will eventually drop?

     

    I think I’m better off buying dividend stocks, cashing in the distributions and continue my ride on the market. What would you do if you had $5,000 to invest? Would you buy stocks or keep waiting?

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