Recently Dividend Growth Investor wrote a post about three different dividend strategies. To quickly summarize, they are:
1. High yield stocks with low to no dividend growth
2. Low yielding stocks with a high dividend growth rate
3. Average yield and an average dividend growth
The question that any investor would obviously ask right at the outset is which one is the best strategy for most people. High yield stocks can be very enticing to investors looking for income due to the high levels of cash flow that they throw off. However it does not take long for a beginning dividend investor to realize that the lure of these high dividend yields is quickly throw off with the huge risk that is taken to get that yield. The yield is high for a reason and it is to offset the massive stock price risk you are taking by buying these high dividend stocks.[ad#tdg-embedded]
The low yielding stocks are often ignored by dividend investors because of their initial low income producing aspects. However, I believe that these stocks should not be overlooked at all because the real power with a dividend growth strategy is the long term benefits due to the compounding nature of the growing dividend. An increasing dividend over time means more money and if you reinvest that dividend more money plowed back into the market. This over time can have dramatic impacts on your portfolio.
The average yielding stocks with average dividend growth is right in the middle. This strategy does not look for stocks with the highest or lowest dividend yield, or the highest or lowest dividend growth rates. Instead it focuses on finding very strong companies that will provide sustainable dividends over time because they have strong fundamentals and can stand the test of time. My experience has shown that stocks on either end of the spectrum tend to not exhibit this stability or even growth.
As you can surely surmise my now, my chosen strategy tends to fall in that average category. First and foremost before buying a dividend growth stock I am looking for those fundamentally strong companies. I certainly want to see that dividend growth, but most important is that the company is strong. I agree completely with DGI when he says, “It is more about finding the stocks with sustainable competitive advantages which allow them to enjoy strong earnings growth, which would be the foundation of sustainable dividend growth”.
#1 makes me think of Consolidated Edison and #2 Canadian National Railway, which I own.
Like you, I usually rule out #1 type stocks, because of the risk and the fact that the yields will grow less than the rate of inflation, so you are losing ground. Good post.
I invest in companies all over the spectrum. I like high dividend yields that are well-covered. I like average yields with decent growth. And I like lower yields with very good growth.
Mostly I assess the company as a whole- the dividend, the growth, the debt, the industry, the competitive advantages, the valuation, and so forth.
Great post! I, and some of the other team members, prefer the stable companies with low payout ratios, with a history of increasing dividends. Nothing worse than a company that can’t sustain its payout, and payout ratio does a good job in determining who can handle it. Like DGI always mentions: Yield on cost is huge! I also like to look at the Dividend Artistocrats index because it keeps with a lot of my Philosophies.
Some of the other members like to chase yield for fun, but no one makes it a cornerstone of their portfolio! That’s just asking to have your income and net worth smacked. Glad to see such a great post, I’ll be sure to check back here more often!
Thanks,
Timothy
Wealth Artisan Team Member
I agree with this strategy.
I do have a question that I would like to hear opinions & reasoning on related to what to do with dividend stocks, when a major market downturn is anticipated or in progress, e.g. something like 2008 through March 2009.
Is there an advantage to buy & hold through any storm allowing prices to drop and dividend yield to rise, thus collecting/reinvesting more shares during the tough timres?
Or, sell at some percentage down, e.g. 7% and buy back in when the market is in a confirmed uptrend (Investors Business Daily) approach?
Joe – what you are proposing is market timing and I have never been able to do it – ever. I simply buy when I have money available and make sure I have a good asset allocation. I let it to its work and do not try to time it at all.
I find the high yielding dividend stocks with reasonable payout ratios to perform well. I find it is best to enter 45 – 60 days before the ex-dividend date as there is usually a share price run up to the ex-date and then a short term sell off after going ex-dividend.
Just wanted to agree with your last point. It is about the company that will be around 10-20 years from now that will provide a dividend. I see many high yielders today, but their long term earnings are not sustainable and who wants to own a piece of business that keeps loadin up with debt and or dilutes your position with equity sales? Not me. Great work, thanks for sharing.