Investing in Dividend Paying Equities - a strategy well worth considering

I never used to pay much attention to investing in dividend stocks. There are a few reasons for this:

• For many years I enjoyed very satisfying annual returns by speculating in precious metals, oil and upstart companies - the potential for capital gains was my sole focus.
  
• I had a strong financial foundation and mental appetite which positioned me to assume a fair degree of risk and volatility. I had spent years in preparing a sound basis for investing in this style. For example, through years of living frugally and making wise life decisions, we were in the position of having no debt, major savings, and defined benefit pension plans .... these circumstances were the result of conscious choices – not “accidents”.
  

However, in recent years, I have started to pay more attention to dividend income. Why?

• a “sense” that dividend income will enhance the performance of my portfolios in the current environment of slow economic growth.
  
• a desire to spend less time in managing my portfolios i.e. it takes considerable effort to discover and manage investments in promising enterprises such as Questor Technologies, Polaris Minerals and the like as opposed falling into long-term relationships with “steady eddies” such as Nestle, Johnson & Johnson, and the North West Company, companies which have been in my portfolios for many years.
  
• my past experience of “being paid” to wait patiently for undervalued stocks to be recognized finally by Mr. Market. In several instances, dividend income compensated for declines in share prices thereby facilitating the wait for better times.
  
• a growing realization of the beneficial tax treatment accorded to dividend income as compared to other types of investment income.
  
• a comparison of the long-term performance of “dividend aristocrats” in relation to other companies listed on stock exchanges (the best of 'em are generally less volatile, especially if they have sound financials and great management).
  

The Ramble

Most sailors take every opportunity to visit other craft in the fleet. It's part of the social routine of life afloat. Moreover, it affords one with the opportunity to learn about equipment and sailing techniques in a hands-on fashion ... most skippers are very willing to share their views. Over time, however, I've learned to take such “advice” with a fair degree of skepticism i.e. get three sailors together and you will receive four opinions.

There is only one person whose nautical advice I accept unconditionally – he's one of the smartest people I know. He has a very original mind, technical skills acquired through training as an engineer and decades of tinkering, and a mindset shaped by more than 40 years afloat – often in wilderness settings. Most important, his approach to boating resonates with me.

I have yet to encounter someone like him in the world of dividend investing, but the search continues. It is all a matter of “mental fit” - finding someone whose approach is congruent with mine.

In light of this, I decided to learn more about dividend investing by taking an approach akin to the “analysis of extremes” - a technique I used many years ago while writing a post graduate thesis. In brief, the approach seeks to understand a phenomenon by examining the extremes of behaviour – in my case, patterns of recreational travel which could not be explained entirely by distance decay models which assume normal statistical distributions of travel data. In essence, I analyzed the “outliers” in my data set through the use of non-parametric statistics. I learned a lot. By combining an analysis of extremes with an examination of normally distributed data, I was able to develop a more robust understanding of travel patterns than with a more conventional uni-dimensional approach.

This experience was not forgotten and I have used it to advantage on many occasions.

I decided to give it a try in my quest to broaden my knowledge of investing - to focus on the “extremes”: individuals who focus narrowly on investing for dividend income.

As a result, I started a program of reading (more about that in later posts) and visiting the web sites of a few individuals who focus narrowly on investing in dividend stocks.

Here are a few of the most useful sites – useful in the sense that they provide a list of potential candidates for further investigation. I will not review them in detail.

For Canadian stocks:

Michael Weber is a 20-something accountant who is very open about sharing his ideas and the contents of his portfolio. He maintains a Canadian Dividend All-Star List which is useful as a start for in-depth research on potentially profitable investments. Although he does not swing a big line at present, he is laying the foundations for a sound financial future. Well worth reading. Much of his approach is based on the work of David Fish (see below). Weber also provides some links to a few useful web sites of interest to dividend investors. http://www.dividendgrowthinvestingandretirement.com

For U.S. stocks:

David Fish is followed widely, and for a good reason. He thinks well and writes clearly. I subscribed to his blog immediately upon encountering it. http://seekingalpha.com/author/david-fish/instablog

Rising Dividend Investing is another blog worth following. Ever wonder about the relationship between rising stock prices and the importance of dividends in total returns over the long term? Here's one take:

The most important element of dividend investing is the statistically significant long-term relationship between dividend growth and price growth. Understanding this relationship is the key to unlocking the true power of dividend investing.

http://risingdividendinvesting.blogspot.ca

The DIV-Net is a very useful site in that it provides links to 21 other sites focused on dividend investing. It is well worth visiting.
http://www.thediv-net.com

For General Information

The DRIP Investing Resource Center provides a wealth of information about dividend investing. Make sure to visit the following sections of the site: Research, and Books.
The American Association of Individual Investors is a valuable source of information. Since joining it, I have experimented with some of its 60 stock screeners, a few of which are especially relevant for investigating potential acquisitions in the search for dividend-paying equities. http://www.aaii.com/stock-screens

Some General Observations

In my research to date, the I have marked the following waypoints to guide my dividend investment voyage:

• A company's past record of uninterrupted dividend payments and increases is somewhat indicative of its resilience over time.
  
• Dividends paid out by strong companies will generally continue (and sometimes, even increase) during economic downturns, thereby providing a constant source of income.
  
• It is imperative to undertake one's due diligence before even thinking about investing in Dividend All-Stars and other candidates.
  
• Diversification among various sectors of the economy is very important.
  
• My time horizon with dividends is in the area of decades. I am prepared to endure volatility provided that I have faith in the fundamentals of a company.
  

I have yet to embrace the benefits of dividend re-investment plans (DRIPS) – one way to re-invest dividend income painlessly and economically. I'll start my voyage by visiting sites such as:
http://www.dripprimer.ca/

http://www.theglobeandmail.com/globe-investor/investment-ideas/strategy-lab/dividend-investing/good-to-the-last-drip-five-ways-to-reinvest/article13259774/comments/
(The reader comments for the above-noted article are far more revealing than the article itself.)

http://www.canadiansecuritieslaw.com/2012/05/articles/securities-distribution-tradin/stock-dividend-programs-is-it-time-to-turn-off-the-drip/

Dividend History is an interesting site. It describes itself as follows:

Here you'll find dividend information and dividend paying stocks with complete payout histories, increase announcements, growth, yield and much more.  

Stock data is currently being added to the database focusing on NYSE, Nasdaq, TSX, LSE and ASX exchanges.

http://dividendhistory.org

It stands out from its peers in that it has dividend information for stocks listed in the UK, Australia and North America. It also presents weekly dividend reports:

Dividend Reports are published every Friday. They are intended to help build a balanced portfolio of dividend paying stocks in each sector. Reports are shown in a newspaper style list that is grouped by category and ordered by market cap so companies can be compared with their peers. Fundamentals such as PE and PB are included with percentages changed for various time periods and 52wk high/lows to help buy on the dips. 


These are some of the most useful sites of the many I have visited on this voyage.  I will supplement them by some focused reading of some of the classic texts on the topic.  They can be found easily by searching on the web.

If you look at the performance of equities in the Financial Log Book, you will see that some of the very sound dividend-paying companies have done wonderfully well in recent years.  Some of them such as Waterfurnace, Rocky Mountain Equipment, CN, North West Company, Deere, and ABB have become core elements of the portfolios I manage.  

While I will always keep an eye out for young, promising companies such as Kelso Technologies and speculate from time to time in precious metals and the like, dividend-paying companies will assume an increasingly greater role in my portfolios.