Dividend growth investing

Investing / Brokers
1

I have been reading about dividend growth investing lately. I am an active reader of the forum so I am aware of the reservations most people on this forum have towards dividends (mostly due to the tax disadvantages we have in switzerland regarding dividends).

Some good points made in this topic → Dividend investing - ETF v’s Building your own portfolio

From a psychological standpoint I find it tough not to be interested in dividend growth strategies. Articles like this one do a good job lathering me up → 5 Reasons to Be a Dividend Growth Investor

My main question is, are there any people on this forum (Swiss tax residents of course) who are pursuing such a strategy? And what are your thoughts? The only person I could really find who seems somewhat interested in the topic is Thomas the Sparkojote.

Right now I invest half of my monthly investing budget in VT and VOT and the other half in SCHD and SCHY. Wondering if we could curate some of the thoughts on this topic into a single thread.

Happy investing,
Mace

1 Like
2

I am on an accumulating phase and I am not chasing dividends.
I prefer invest in company that will find a better usage of cash generated to reinvest the cash into a productive business generating more cash-flow. Some high paying dividend companies, could be mature and not generating enough cash-flow to sustain their dividends.

I prefer to invest in company that do not pay dividends as it is also more tax efficient in Switzerland.

You can still switch to a dividend portfolio close to retirement or resell part of your share to sustain your lifestyle.

1 Like
3

Yup, I’m pursuing a (mostly) dividend growth investing strategy.

Some slow dividend growth high yield or flat dividend yield stuff as well, but probably 90% is picked for dividend growth.

You can check a stock picking thread I started here or take a look a the picks at my live portfolio view here.

Despite the seeming tax disadvantages for some I like this style of investing because

  • of the pure joy steady cash flows generated
  • I am phasing out of the accumulation phase into the consumption phase and it feels great to not have to sell (especially in this recent bear market) and instead be able to consume the steady and growing dividends produced by companies
  • even for dividends not consumed I like being in charge of selecting the companies I want to (re-) invest in

You’ll find a couple more angles in that stock picking thread I mentioned above.

Edit: fixed typo (generate → generated).

1 Like
4

„Companies that initiated and grew their dividends posted average annualised total returns of about 9.5% from 1972 through to the end of 2012, compared with 1.6% for companies that did not pay a dividend. This is likely because companies that can commit to a recurring dividend payment in cash are often inherently healthier companies.“

(J.P. Morgan Investment insights based on Ned Davis Research via here).

All dividend payers returned 8.8%.

1 Like
5

This point is also addressed in the article I linked, which is why I find that article so interesting

This is true. And as I understood it even with this dividend growth investing strategy those companies are weeded out. Dividend world is a large world… I find this the same as saying ‘some stocks perform poorly so I dont invest’

6

You could even make the reverse point: companies that don’t pay a dividend might invest their cash internally regardless of whether there’s a good promise of a return on capital.

Companies that pay a dividend will have less “play money” on their hands and will be more disciplined about where to invest internally.

I have seen this firsthand as a Xoogler: the company burnt and burns billions on projects that went and will go nowhere (anyone remember Google+? Or other such projects, see killedbygoogle.com) or acquisitions that were botched or canned or outsized stock based compensation* – all financed by the formidable cash printing machine called Ads. As a shareholder I would prefer fewer of those “moonshot” projects and a slice of that Ads profit in the form of a growing dividend.

* Hipocrite I am, I know - I liked the stock based comp as an employee. :wink:

2 Likes
7

Personally I really don’t understand the arguments made, except maybe the psychological ones. For instance the article seems to conveniently mix up a lot of things. E.g. it says dividend is hard cash and it can’t disappear, but then it also says you’re likely reinvesting it in the market. If you do that and the market tanks, you end up in exactly the same position, whether you had dividend or capital gain (through buybacks or not).

If you want “safety” just rebalance with wealth preserving/fixed income allocation (bond, etc.), no need for dividend for that (you sell equity when it goes out of balance, and vice versa).

Just the fact that share buyback exist, and is roughly equivalent to dividend is a good argument to not treat it differently.

Also are the growth data doing equal weighting? (as usual it would make sense to compare to standard cap weighting).

5 Likes
8
10

That is amazing thanks for linking those. So many stocks :). I have some of those as well.
The first book I ever read on investing was ‘The Lazy Investor’ by Derek Foster. That is when dividend growth sparked my interest.

I started investing by participating in Canadian DRIP programs with companies directly through their transfer agent (long time ago) . To this day I find this an underrated strategy as many companies offer discounts on their stock price when participating in their DRIP program. I Stopped doing this though because I became a non resident of Canada and the paperwork for maintaining these investments as a non resident was ridiculous.

Have you ever used the ‘reinvest dividends’ feature on IBKR?

2 Likes
11

I think the motivation would be free compounding… If you invest in healthy companies with a history of raising their dividend, it seems pretty lucrative to me. Especially when you factor in that downswings in the stock means your dividend buys more of said stock. AKA if the stock price stays flat (or even goes down) your position grows in time since you accumulate more shares. With non dividend payers your position also stays flat. I think this is what the guy means in the article.

12

Cheers!

I’ve heard of ‘The Lazy Investor before’ before - now I feel like I have one more reason to read it. Thanks for putting it back on my radar.
As a side note: isn’t it kind of amazing that - at least for the retail investor - probaby most useful books will have dismal readers/reviews from a publisher’s POV?

The book’s synopsis BTW reminds me of someone I follow on Twitter/FinTwit - @johnyboy1853 (“Dividend John”, a Canadian fellow as well) - who recently published his book “Too Rich to be Stressed: Freedom with Dividend Investing” (Kindle sample).

I haven’t read it, either, but following Dividend John’s Twitter updates, I feel his investing style is similar to mine aka Dividend Growth Investing (perhaps with a bias more tilted towards Canada) and perhaps similar to Derek Foster?

“So many stocks” you say … yeah, I really like diversification even if some call it diworsification. Diversification is the (if not the only) “free lunch” from investment theory, IMO, for believers of the Modern Portfolio Theory (MPT).*
I’ll happily sacrifice excess return over excess volatility because I don’t have the stomach for volatilty risk (“becoming a forced sellter out of financial/emotional resaons even of quality companies bought at reasonable or attractive valuations” – Chuck Carnivale, aka Mr. Valuation).
And for those readers of this thread who are fans of concentrated portfolios: congratulations to you for having the stomach for this - I am psychologically (and financially) not equipped for this.

Short answer: no.

Unfortunately, I hold most of my investments with Swissquote. I have a small IBKR allocation, mostly for trying things out and prepping for moving things there if/when Swissquote enforces their new fees on my Swissquote custody account.**

That said, a few of my companies, including some Canadian ones, offer dividend reinvestment via Corporate Actions (e.g. Bank of Novia Scotia (BNS), Imperial Brands (UK:IMB), Legal & General Group (UK:LGEN)), MAIN, OXSQ).
The corporate action reinvestment option is available at least on Swissquote (though I assume the ‘reinvest dividends’ feature on IBKR is the same or similar?). Basically, you get offered to purchase shares instead of getting paid dividends with close to zero transaction costs for the purchase of the shares. I subscribe to this option for all my companies that offer this, whenever I feel the company’s valuation is still attractive.

* Most of the rest of the MPT is garbage, IMNSHO.
** They already tried enforcing NAV based fees on me in March 2023, but after threatening that I pull out, they retreated. It’s a space I’ll have to continue watching, though. I expect to be pulling out of Swissquote eventually.

1 Like
13

If I understand your critique correctly, you would say that ex post you basically cannot distinguish between “div growers/initiators” and “cutter/eliminators later on” and therefore the “average” is tough to outperform?
Apologies if I misunderstood your basic premise.

The way I deal with selecting dividend growers is - admittedly - heuristics:

  • look at the number of years the company has paid dividends
  • look at the number of years the company has increased dividends
  • look at when they last cut their dividend
  • look at whether they cut their dividend in the last recession

This does not protect you from surprises, but it helps tremendously. In my portfolio of 100+ (mostly) dividend growh companies, there’s maybe 10% who have halted or cut their dividend in recent years.

14

Are you sure about the book name and or author name or is it an old one? I can’t seem to find this book on amazon.

16

Yea I’m sure. And yes it is also an old book. It’s a purple book and also says “start with $50… and no investment knowledge”. It shows up on Google

17

Again, apologies - I believe I misunderstood your previous responses.

Good luck with your current strategy!

1 Like
18

Indeed I found it thanks, just not on the usual Amazon website I use but in the amazon.com.

19

100 companies is big numbers to follow up!
It must be hard to follow!
Do you have any tool or methodology to help you?

20

Well, I don’t believe I have to follow most of the companies that closely.

Once I’ve made a decision to buy, I have already convinced myself that the company checks all my boxes on a time horizon of a couple years forward (and ideally with many more years of evidence looking backwards).

I’ve thus built my conviction and it helps me stick to the company without having to check on news about them on a daily basis. On average, probably 90% of my time went into researching the company for a buy decision versus following up on it afterwards.

Of course it’s a spectrum, though: from companies on the one end requiring almost no attention at all (well, maybe except for looking at when they might become attractive to buy into) and on the other end perhaps more risky companies that require closer attention (maybe a check-in on a quarterly basis after earnings season or as news about the company surfaces (e.g. they might be about to cut their dividend or already have).

Maybe more concretly with regards to companies in my portfolio:

Johnson & Johnson would be on the “no brainer” end of the spectrum: I buy them when they become attractively valued, no need to (re-)do a deep analyis and read up on their latest 10-K SEC filing.
Amgen, Bristol Myers Squibb, Broadcom and many many others would also fit that bill IMO.

VFC Corp would be an example on the other end of the spectrum. They cut their dividend in Q1 after many of decades (well, 50+ years, actually!) of raising their dividend consistently. The cut seems to have been the right decision for the business and they seem to be back on track (and I still hold them), but I watch their potential recovery closely.
Intel, Medical Properties Trust and a few others fall into this bucket as well.

In practice, I scroll through my portfolio with the FASTgraphs tool (see a brief discussion on this tool in my stock picking thread) on about a monthly basis, eyeball with a really quick glance that my “no brainers” are still “no brainers” and focus on the maybe dozen or so companies that are on my potential exit watch list. For a few of these, I check recent SeekingAlpha articles on them by authors I subscribe to, I read earning call transcripts and check their 10-K /Q on the SEC’s edgar site.

If a company really looks like they’ve lost their mojo, I sell. E.g. I sold Carters after they cut their dividend and their prospect looked vague, I sold EPR Properties after their dividend cut and then unsure outlook (though in hindsight I regret selling) and I sold IBM as I believe they’re on terminal decline (and in hindsight I never should have bought them in the first place).

Of course I keep learning and adapting as we speak, but that’s the overall gist of my current methodology.
It admittedly takes more time than DCA into an index, but I enjoy it and it alllows me to optimize for growing dividends.
And I enjoy doing it. :slight_smile:

Hope this helps?

3 Likes
22

Hey, asking for a friend … how do you permanently delete posts on this forum?

Ok, more seriously:

  • $VFC has been my worst investment this year. Maybe ever? My investment experience is small on a time horizon perspective, though, so don’t overcount “ever”.
  • especially (since starting) this year I have begun to consume returns of my portfolio and at the same time experiencing meagre capital appreciation on some parts of my portfolio, I really appreciate being able to just consume parts of the dividends instead of having to sell off parts of the principal
  • possibly - or even most likely! - I would have fared better from a total return perspective by having been in the S&P 500 instead of my stock picked portfolio (which has an almost 100% beta correlation with the SPY), but psychologically I have to say it feels just great to not have to touch the nestegg and instead to just consume (some of) the eggs.

In my initial Dividend Growth Investing approach I would have sold $VFC right after their first cut. Just out of principle. Aka: Dividend cut = Sell.
In my more “nuanced” approach since I found that initial approach to be too black-and-white (but in hindsight maybe I should have stuck with that basic instinct?). Currently I feel like sticking with my “wait-and-see” approach, even with twice-cutters like $VFC.

My initial “knee-jerk” dividend cut sells:

  • $CRI, sold with profit: got me out of $CRI in October 2020 after getting in in May 2020.
    If held until today I would be essentially flat (-0.35% total annual return) if I had stuck to the initial position.
  • $EPR, sold with loss: got me out of $EPR in November 2020 after getting in in August 2020.
    If held until today I would be up about 18% in total annual return if I had stuck to the initial position.

I have a couple more along those lines ($FL, $MDP, $TAP) which are overall severly up since my sell points, and overall, I feel like - given the company is not rotten - sticking to the company even if a year or two is bad. In the long run, I will benefit from the overall increase in productivity, profits, etc, even if I somehow unluckily (or just statistically averaging) picked not the greatest entry point from a price perspective.

$VFC is also a personal lesson for me, which is going to sound like a really lame excuse (but maybe someone else will benefit from this): in essence, I followed a story/narrative instead of the pure numbers:
I don’t think I would have considered $VFC myself. I mean, I had heard of North Face, icebreaker, Timberland and some of their other brands, even with personal experience dating back decades, and I think they’re great brands and they produce products that people will continue to buy … but they appeared on my horizon because (a) independent brand “SUPREME” was cool at the time in the then teenager demographic, (b) important family member X in that teenager demographic thought “SUPREME” was cool and totally bought into the overpriced merchandise despite their personal limited budget, (c) I thought that this was sufficient to explain the then growth perspective of the company.

In hindsight, I should never have bought the company based on my own principles. Their “vanity” purchase of “SUPREME” seems to have been a bad investment. I was misled my my personal color of the purchased brand.
I should have sold at the latest at their first divident cut. Out of principle. My previous “principle” sells seemed to guide differently, or at least without clear guidance, but as a safe rail, this would have worked well.
My main mentor I am following sold yesterday. I will hold. I believe with a 10 year horizon, the brands under $VFC will do well.
Call me stubborn.

Sell as you see fit. :slight_smile: