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Becoming a Successful Dividend Growth Investor

Dividend Growth Investing the best investment strategy

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Dividend Growth Investing.
What a interesting topic. However, it’s a topic that all investors, beginner and seasoned should, at least, consider studying.

If you are doing your own research on investment and how to invest your money, you have probably noticed that there are an incredible amount of way to invest money:

  • Mutual fFnds;
  • ETFs;
  • Growth stocks;
  • Value stocks;
  • Dividend stocks;
  • Preferred shares;
  • Options;
  • Bonds;
  • Currencies;
  • Commodities;
  • Real Estate; and
  • much more…

When you look at this list of option, you can feel overwhelmed a bit.
However, investing is important for financial independence, regardless of the amount you can save, be it 100$ or 10000$.

For those who are looking for an investment strategy that will give the opportunity to compound their wealth through time, a Dividend Growth Strategy is your best course of action, in my humble opinion.

The Fees That Eats

I am also a big fan of a DIY approach when it comes to investing.
Normally, you would go to your financial advisor and give him your savings. He will then, most likely, invest your saved money into mutual funds. These mutual fund will, in turn, charge you more than 1% management fee for the assets under their management.
1%… That is quite low, you must say. However, let’s look at an example to get the feel for that 1%.

The average, inflation adjusted, compound return for the S&P 500 is approx. 6.8% per year a very long term.
By juggling the numbers and doing some maths, by paying that 1% you are giving up close to 14.6% of your own return to the mutual fund management, and that is not including you financial advisor own transaction fee!
However, by paying that much, you should be getting what you paid for right?
You should be getting higher return than the S&P 500 since it’s an un-managed index.
But, it’s not the case. Looking at the historic return of low cost index funds, it seems that most of the time, they outperform the high cost funds.
Also, you don’t have any decision power on how the assets are managed, you don’t have much transparency in what is happening. All of that makes it very annoying for an investor.
The solution to those management and transaction fees is quite simple. Remove the management and the financial advisor.

How to do that?
Simply by holding individual securities yourself.

If you buy and hold great businesses that pay you a growing dividend income each (or almost) year, and if you are not paying neither your financial advisor or some mutual fund manager for it, you will end up with an increased return!

However, I know that a lot of investors are scared away from actively investing in individual securities and managing their portfolio themselves. They believe that it is complicated, confusing and time intensive.
But it doesn’t have to be! When I began my career as an engineer, I was investing in mutual funds for my retirement but I always was dissatisfied with their portfolio management and the abysmal return for such a high fee. As such, a few years ago I made the jump and I am now managing my own portfolio with company I trust and understand.

However, as with most investor, I did not catch the Dividend Growth investing train first, I was more appealed by Value Investment for which you are looking for company that you can buy undervalued and hold them until they reaches fair value. It makes sense to buy cheap and sell at a higher price, for example buying shares of a business 5$ when they are really worth 10$.

But, the market being what it is, it’s not as easy as it sounds. Although I had some very good successes, it did not fit myself nor my personality very well because I am lazy. As such, I delved back into the world of investment to find something else. I was actually lucky to find information on Dividend Growth early on my research as I found that it was a very appealing investment strategy.

Becoming a Successful Dividend Growth InvestorBecoming a Successful Dividend Growth Investor

Dividend Growth History

Let’s start with a bit of History.
The father of Dividend Growth Investment is, without any doubt, Warren Buffet.
Using a tweaked version of, Benjamin Graham value investing strategy, he achieve a phenomenal success and became a multi-billionaire worth more than 60 Billions USD.
He tweaked his mentor’s strategy by applying a value centered approach to what he called wonderful businesses into what would become dividend growth investment.

It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. – Warren Buffet

But what is a wonderful company you might ask.
Let’s look at one of Buffet’s longest holding Coca-Cola (KO). Everyone can potentially create a brown sugary bubbly liquid that taste great. But, not all company can replicate the brand success. As such, Coca-Cola hold a distinctive brand equity advantage that it’s very hard to beat. As such, a great business has a strong and long lasting advantage over it’s competitor that will last for a long time (forever preferably).

Minimize your fees

Have you ever looked at the overall fees that you incur when trading any securities?
Every single time that you buy or sell any security you will incur some form of cost called frictional costs:

Based on those fees, the more you trade, the lower your return.
That is why individual investors, such as you and I, tend to underperform the market. However, if you buy and hold that security for a very long time (forever) you will not have to incur those frictional costs often.

When we own portions of outstanding businesses with outstanding managements, our favorite holding period is foreverWarren Buffet

This citation from Warren Buffet says it all. And he has been very stubborn at that, selling it’s core holding very rarely.

Another very nice and powerful, but hidden, benefits of holding forever is that the tax money you would pay due to capital gain, if you would have sold, is left to compound and grow in this security that you have invested in.
Dividend Growth investing is perfectly suited for this strategy of buying and holding great dividend paying company that will increase year over year.
This should be a great incentive to hold your share for as long as possible, because technically, the longer you hold, the higher your dividend grows and the higher your income becomes. This is specially true if you keep reinvesting your dividend growth in the same companies.

Why Choose the Dividend Growth Investment Path

Warren Buffet.

He has to be the most successful Dividend Growth investor of all time.
More then 90% of it’s portfolio is invested in dividend paying shares. And if you look closely, you will notice that most of these dividend paying stocks have long dividend growth history.
Granted that this is not a factual proof, but still a proof of the dividend growth investment strategy efficiency.

Factual evidence

A compound total annual return study from Ned Davis Research Inc for the stock market from 1972 to 2018 shows the following results:

Group NameReturns
Dividend growers and initiators10.07%
All dividend paying stocks9.25%
No change in dividend policy7.47%
Non-dividend paying stocks2.61%
Dividend cutters and eliminators(0.35%)
Source: 2018 Ned Davis Research Inc. Past performances does not guarantee future results. Indexes are un-managed and one cannot invest directly in an index. All stocks were categorized by the following methodology for total return each 12-month period since Jan. 21, 1972 period ended Jan. 31 2018. Dividend Cutters and Eliminators represents stocks in the S&P 500 that have lowered or eliminated their dividend; Non-Dividend-Paying-Stocks, represents non-dividend-paying stocks of the S&P 500; Dividend Payers With No Change represents all dividend-paying stocks in the S&P 500 that have maintained their existing dividend rate; All Dividend-Paying Stocks represent all dividend-paying stocks in the S&P 500; Dividend Grower and Initiators represents all dividend-paying stocks of the S&P 500 that raised their existing dividend or initiated dividend. Performance doesn’t not represent any unit trust or strategy.

Looking at those results, it can be seen that the dividend stocks performed very well.
In my opinion, these businesses did so well because businesses must generate actual income and be in good financial health to be able to comfortably distribute part of their profit to shareholder every year.
Now, a company that is in the Dividend Grower has to be increasing dividend year after year, a testament to the business model and financial health of the company. This is why, they can reward their shareholder with rising income.

Dividend Aristocrat

If you’ve been doing your research on investing strategies, you might have come upon them: the Dividend Aristocrats.
But who are they? This is a select group of great businesses that have increased their dividend payments for the last 25 (and more) years. As such, this is a group of stable, profitable and well managed business that are very well suited to the dividend growth investment strategy and include the like of:

For the United-State

  • Coca Cola (KO)
  • Clorox (CLX)
  • PepsiCo (PEP)
  • Wal-Mart (WMT)
  • Procter & Gamble (PG)
  • Johnson & Johnson (JNJ)

for Canada

  • BCE (BCE)
  • Telus (T)
  • Canadien Tire Corporation (CTC.A)
  • Enbridge (ENB)
  • Suncore (SU)

It is to be noted that the on both side of the fence, the Dividend Aristocrat Index has outperform the S&P and TSX.
Also, these outperforming return were all achieved with a lower stock volatility, which means more stability to your portfolio. You must know that there are very few investment method out there that are able to outperform the market year after year for a significant period of time.

Conclusion

The historical evidence is there to convince you to change. A Dividend Growth strategy is a safe, reliable and low cost solution.

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