Power of Dividend Growth

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Postby AltaRed » 19 Dec 2008 01:40

Sensei wrote:Anyway, my number 6 was derived as a ballpark average of companies I own that have increased 10+% per year vs. companies that have increased very little. It's about half and half, so 6 seemed like a good historical average. I might reduce it to 5 based on the value line figure provided by Brian, even though I think I'll do better.


I don't disagree with you that stock selection can't result in 6, and perhaps more in the short term. But you didn't say that in your earlier post. Shakes and I were calling you on that.

And to achieve that, the stocks you pick must be from companies experiencing above average growth relative to their competitive peers, i.e. taking market share.
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Postby Sensei » 19 Dec 2008 05:48

Hi,

I wrote,

Goodness, Shakespeare, I'd expect any company paying dividends at all to do better than that!


I guess I could be called on that, although I still think that companies paying a dividend have a arrived at a point in the growth of the company which allows them to share out some of the profits and, therefore, are already market leaders. There are exceptions of course as we all found out recently.

Anyway, I wouldn't buy a company unless I thought its dividend was already ahead of inflation (like yielding out 5 or 6%), or that increases on a lesser dividend yield would allow the dividend to outpace inflation in the end.

Interesting point though, and it made me think about a different scenario, ie: what happens to dividends in a negative real growth scenario or deflationary period. Does a reduced pricing mean a company will profit less or pay less dividend? I don't know.

Anyway, I need to find a conservative number that is pretty close at least based on historical growth.

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Postby 2 yen » 19 Dec 2008 08:50

Sensei....I try to delude myself that the coming dividend cuts will coincide with deflation and that those two things cancel each other out. Fat chance, probably. The only ace in the hole is that we are both working still and will be able to pick up more of the better quality players very cheaply, albeit at reduced dividends. To that end, I've put in stink bids on the banks at levels that I feel will yield me 3.5% on a fifty percent dividend cut. Pesimistic stuff, but I want a plan so that I can at least face the coming storm with some kind of strategy to get me out the other side.
I'm hoarding cash in Canada via the depressed Canadian dollar vs. yen, which I get paid in.
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Postby Shakespeare » 19 Dec 2008 10:21

I need to find a conservative number that is pretty close at least based on historical growth.
The problem with US-based long-term numbers is that they are based on a period when the US overtook other economies to become the largest in the world. That period is ended, and the US may now be overtaken eventually in its turn, so US dividend growth figures based on the last century may not now be attainable.
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Postby ralphmow » 19 Dec 2008 10:32

2 YEN.... I'm also thinking in terms of a deflationary envirnment where dividend cuts are likely (ie. banks). So far I've got your 50% cut possibility as well as another viewpoint of "at least 20%" for banks. I've set target buy prices well below current prices to establish a diversified (by sector) portfolio averaging 7% (cost yield) to compensate for div cuts. Hopefully the cuts will have already occurred when I establish some of my positions.
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Postby couponstrip » 19 Dec 2008 15:48

sensei wrote:Anyway, I wouldn't buy a company unless I thought its dividend was already ahead of inflation (like yielding out 5 or 6%), or that increases on a lesser dividend yield would allow the dividend to outpace inflation in the end.


Do you think this will keep you out of trouble in your buy and hold portfolio? How do you know you aren't picking tomorrow's Polaroid, Goodyear, Xerox, KMart, AIG, or AT&T? Dividends are a good thing....until they stop paying them, then they were a good thing. Generally speaking, markets have taught many over the years, too much of the same thing can end up being a bad thing.

Remember when buying and holding a diversified portfolio of income trusts for the long term was the way to go?
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Postby Dividend Growth Investor » 19 Dec 2008 18:59

Couponstrip,

Actually it is quite possible to create a diversified portfolio using only dividend growth stocks ( achievers , aristocrats or champions). By diversified I mean large, mid and even small cap US or international stocks. You could also add or remove certain sectors ( or be invested in hte 9 sectors of the S&P 500 for example ).

Most Dividend stocks will continue to be solid investments even if dividend taxes are increased to their pre 2003 levels, provided that you picked stocks that have good business models and represent various industries.

The issue with canadian trusts was that most people bought them just because they were chasing the high yield, not because they understood or liked the business model. Furthermore, most canadian trusts are concentrated in few sectors, aren't they?

There is a chance that you will pick the next AIG, FNM, FRE etc. That's why one has to be flexible and have a rule to of when sell. Also just buying and holding a set of stocks might not be the best idea, as new industries emerge. Reinvesting your dividend income in your accumulation stage in new/other companies might be another possibility.
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Postby Sensei » 19 Dec 2008 19:15

Hi,

Coupon, I can understand your frustration with one-trick pony investment strategies. But, referring to my portfolio, I think, you wrote:

Do you think this will keep you out of trouble in your buy and hold portfolio?


I don't have a buy and hold portfolio. I clearly wrote above that it is important to sell when stocks or bonds no longer meet your criteria that you originally set out, whatever your stategy is. For example, in a dividend portfolio, dividend cuts, evidence of a deteriorating moat, reduced cash flow, unsustainable payout ratio etc. can all be determined (even by me) by a regular review and are good indicators to make a sell decision. Also, FWIW, my dividend portfolio is not my only strategy. I have at least as much again invested in tax free mf portfolios, mainly focused on Europe and the the far east, world-wide small caps, specialty funds, as well as cash. IOW, things that aren't or can't be represented in my div port.

Cheers

Edited
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Postby JaydoubleU » 28 Dec 2008 04:24

Hello everyone, Happy Holidays!

2008. Yawn.

What are dividend growth investors planning for 2009? :)

Care to suggest your strategies, thoughts, or top picks?

As for me, I am waiting for the first quarter earnings report to come out from the energy sector, and when it truly shocks, as I think it will, I am thinking to pick up some shares of HSE and ECA.

I also want to add to FTS, not because it's cheap or expensive or here or there, but because with the longest dividend growth record on the TSX, it just may be the only one to count on next year.

Thinking to add to a position in POW: buying at very low P/B and P/E.

A little torn in the telecom sector between cheap+no growth and not cheap+higher growth. Guess which?

SAP is bumping along at a 52-week low.....

Non-Canadian picks include JNJ, DEO and ATO. I will try to hold off, however, until the inevitable correction in the recent USD rally.

As for banks, we're pretty much fully invested. Would add to TD under $40, or BNS under $30, but these are not top priorities now.
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Postby Operabob » 28 Dec 2008 12:47

Continuing to make strategic investments in my DRIPS with optional cash payments and letting my dividends reinvest.

OB
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Postby fin0007 » 28 Dec 2008 15:52

I have about 80% of my portfolio in Canadian Financial services stocks. Also have some Enb and some Cat. There a few other stocks, like Aliant.

I suspect the Cdn market will go back and forth in January. I beleive the first of the financials will be GWO around the middle of February. There will be a stream of quarterly reports from there with TD reporting early March.

I was surprised to see someone reporting FTS as having one of the longest dividend increasing records on the TSX. I looked and FTS are amateurs compared to BNS.

To me it isn't emphased(sp) enough that one of the criteria for selecting a stock as an investment is the quality of management. The stocks I invest in, seem to me to be run for the benefit of the shareholders. That said, I don't try to micro manage the companies I invest in. If management believes it's not appropriate for a dividend increase, well they know better than me.

That's said, somewhere in the group of BNS, TD, RY,GWO and SLF I believe there's going to be a small increase. It may not be untill then there's much of a change in the market direction.

:D :D :P :shock:
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Postby brad911 » 28 Dec 2008 16:20

For myself its more of the same. I now have a portfolio I'm quite content with and will add to my positions over time when they're cheap, I have the money or they drop below my 3% threshold. Cashflow has been my major concentration over the past 18 months and I've increased it substantially to a point where my yearly dividends match my contributions of new money into the portfolio.

I think fin makes a good point on management and its one aspect I've spent a lot of time researching my companies on. This environment, IMO, is demonstrating the need for strong leadership & discipline. Companies that don't have it will suffer while the ones that do will excel on the otherside of this downturn. Those are the companies I want to own and I'm not interested in higher yielding securities whose management are incapable of charting the best course for their business model.
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Postby JaydoubleU » 28 Dec 2008 19:00

Not sure about BNS, fin, but FTS at any rate claims the longest record of dividend growth on the TSX:

The Board of Directors of Fortis Inc. ("Fortis" or the "Corporation") (TSX: FTS) today declared a common share dividend of $0.26 per share on the issued and outstanding fully paid Common Shares of the Corporation, payable on March 1, 2009 to the Common Shareholders of Record at the close of business on February 6, 2009.

The 4 per cent increase in the quarterly common share dividend to $0.26 from $0.25 translates into an annualized dividend of $1.04 and extends the Corporation's record of annual common share dividend payment increases to 36 consecutive years, the longest record of any public corporation in Canada.
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Postby mpav » 28 Dec 2008 21:28

I am just making things simple. Cleaned out my portfolio, running a short list in CAD and USD, DRIPS are all on.

I have added some small amounts to my REIT portfolio, and increased the leverage there.

Outside of that I am saving for a house, so my excess salary gets ploughed into a high interest savings account, but I do invest the interest in equities.

My portfolio is pretty simple:

CAD - MFC/PWF/CU/TRP/RY/CNR/RCI/SJR

USD - JNJ/USB/ADP/UPS

REITS - Calloway/HR

That's it, just good stocks with a growing revenue stream....
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Postby Sensei » 29 Dec 2008 00:06

JaydoubleU wrote:What are dividend growth investors planning for 2009? :)

Care to suggest your strategies, thoughts, or top picks?


Well, I just finished figuring out my monthly income from US / UK dividends. It took a couple of hours since this information is not conveniently listed anywhere. I also have an idea of what part of the month payments will be made.

Strategy? I think 2009 will be a good year to build on what I've got. I've got a lot of 50 share lots in companies I like which could become 100s. HD, GPC, CVX, HOG, HCN, are all such companies. I also identified a few sells over the long term. MSFT and LYG come to mind. My plan is to switch out LYG to HBC. LYG has to pay the government preferreds before they can pay regular dividends again. HBC, much to my surprise appears to be in better shape and is still paying dividends. MSFT funds will go to Molux and/or Linnear, both with well established dividend records in the tech sector.

In Canada, keep it simple is a good plan in my view. PWF, RY, and TD look to be next on the top up list. One add would be BNS. I'm leary of Canadian oil right now and still prefer the majors.

Cheers
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Postby Sensei » 31 Dec 2008 02:07

Sensei wrote:Thanks. Based on some of the above, I'll adjust down a bit. I'm trying to work out a projection based on current dividends + current dividends reinvested + dividend growth + additional investments.


As a follow up to a previous post upthread, I've finally got something in place that seems like a conservative estimate and these are the figures I use for a 10 year US$ dividend growth model.

1. As of Mar 31, 2009, my dividend income should be 6500 per year.
2. I plan to reinvest all dividend income and I'm using an average of 4% yield for any new investments.
3. I expect dividends to grow at 5% per year on average
4. For the first three years I will add US$15000 per year
5. For the final seven years, I will add about $5000 per year
(IOW, I've lowered my expectations for 2 and 3.)

Mathematically, my dividend income should get to around US$21000 by 2019.

Comments? Is this conservative? What could go wrong?

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Postby George$ » 31 Dec 2008 10:02

Perhaps this has already been posted someplace. It does provide a useful longer term perspective on dividends -
Dividends and the Three Dwarfs - a 2003 editorial by Rob Arnott-
The importance of dividends for providing wealth
to investors is self-evident. Dividends not only
dwarf inflation, growth, and changing valuation
levels individually, but they also dwarf the combined
importance of inflation, growth, and changing
valuation levels. This result is wildly at odds
with conventional wisdom, which suggests that,
while the return from bonds is wholly dependent
on income, stocks provide growth first and income
second. It is startling to realize that dividend
growth has averaged less than 1 percent above
inflation during the past 200-year period. And it is
shocking that real per-share dividend and earnings
growth on the S&P 500 Index since 1965 has been
zero.


7.9% is the 200-year total return on equities.

The constituent components of the 7.9% return are:

5.0% = Return from dividends.

1.4% = Return from inflation.

0.6% = Return from falling yields and rising valuation levels.

0.8% = Return from real growth in dividends.
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Postby Taggart » 31 Dec 2008 12:01

Adding to what George posted above:

The Times (UK)

December 30, 2008

The lessons of history leave little room for doubt that the FTSE 100 has further to fall

"So why does the future for equities look so disappointing? There are two clues in the historical data. First, once dividends start to fall it can take a surprisingly long time for them to regain their previous levels. For example, it took until 1985 for the Barclays Capital real dividend index to regain the level that it had in 1972. Second, the average rate of dividend growth over the long term is extremely low. Figures vary, but the Barclays’ data shows no real growth since 1900 – which suggests that future growth in dividends is likely to be modest. In our worst-case scenario, 15 years from now investors will still be receiving lower dividends than they received last year."
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Postby lystgl » 31 Dec 2008 12:18

George$ wrote:1.4% = Return from inflation.



Can you elaborate?
I'd have thunk this would be a negative?(':?')
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Postby George$ » 31 Dec 2008 17:40

lystgl wrote:
George$ wrote:1.4% = Return from inflation.



Can you elaborate?
I'd have thunk this would be a negative?(':?')


I did not write Arnott's article but my understanding from reading it is that 1.4% was the average inflation over the 200 years, (as reflected in the change of the price of the equity share and its splits?) => thus the overall real return (above inflation) would be 7.9% - 1.4% = 6.5%
(This does seem a bit high to me for 200 years!)

(1.014)**200 = 16.13 and
(1.065)**200 = 295,068. :roll:
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Postby George$ » 31 Dec 2008 18:13

Taggart wrote:Adding to what George posted above:

The lessons of history leave little room for doubt that the FTSE 100 has further to fall

"So why does the future for equities look so disappointing? There are two clues in the historical data. First, once dividends start to fall it can take a surprisingly long time for them to regain their previous levels. For example, it took until 1985 for the Barclays Capital real dividend index to regain the level that it had in 1972. Second, the average rate of dividend growth over the long term is extremely low. Figures vary, but the Barclays’ data shows no real growth since 1900 – which suggests that future growth in dividends is likely to be modest. In our worst-case scenario, 15 years from now investors will still be receiving lower dividends than they received last year."

I think this article's message is in sync with Bill Gross in his December 2008 letter - in part (with my emphasis)
Let me first announce a fundamental premise with which I think all rational investors would agree: – I believe in stocks for the long run - but only if purchased at the right price. That statement packs a real punch. It says that capitalism is and will remain a going concern, that risk-taking – over the long run – will be rewarded, but only from a starting price that correctly anticipates the economy’s growth and its share of after-tax corporate profits within it. Acknowledging the above, let’s look at a few basic standards of valuation that historically have stood the test of time, to see if at least the price is right.
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Postby Mike Schimek » 31 Dec 2008 18:58

I started reading that Gross article, then thought to myself; hang on a sec, this guy's a bond guy, so firstly it's in his best interest to bash stocks, not that he would do so, but it is in his best interests. Also it would probably be difficult for him to go out and tell people now is the time to buy stocks, since it would mean he'd be recommending to everyone that holds PIMCO bond fund to sell his bonds and buy stocks instead.

:shock:

With that latter statement, it would be interesting to see how many times throughout his career at PIMCO he has actually gone out and told people "now is a good time to buy stocks instead of bonds", despite it being greatly against his best interests.

I'm not saying the guy is peddling snake oil or something, just mentioning where he is coming from, which is often the first thing I think about whenever I read something; I try to be "on guard" on where the writer's best interests lie.

The article opens with this paragraph;

Here I go again! Gosh it was only six years ago that I cemented my place in stock market history by predicting that the Dow would fall from 8,500 to 5,000, instead of going up to 14,000 where it peaked in October of 2007. Well, I could use the standard set of excuses: 1) No one else saw it coming, 2) I was misinterpreted, and taken out of context, 3) I was tired, overworked, and had family problems, or 4) I had just come out of rehab. But these days what really works is a full confession. I mean, like, uh, it was totally my fault and I take full responsibility. The fact is I was only off by 9,000 points. That’s my story, and I’m stickin’ to it.


I'm not sure how much weight it would be wise to attribute to Bill Gross' perspective of when to buy stocks vs bonds, or bonds vs stocks.

:?
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Postby Sensei » 31 Dec 2008 21:15

Hi,

And Happy New Year!

Well, that wasn't quite the reaction I expected. Two comments:

1. What are the investment alternatives at the moment other than stocks? Even putting your money in the bank seems like a dangerous idea as long as the economy is being flooded with new money. And with the extremely low interest rates, I also haven't seen any compelling bond buys either.

2. Interesting as the Guardian article was, I'm not investing in a broad stock market index. I only have 33 stocks that I will keep and will probably not exceed 35 at any given time. Even though I've probably made 3 or 4 really bad choices, I'm assuming my bad decisions will be offset by the stocks in my portfolio that will not cut their dividend and, over time, increase divdends. My question was, does a numerical value of 5% on average seem reasonable?

Just as a gut, I don't see the FTSE going to the low 3000 level at all, although I guess we'll have some suprises in early 2009. I tend to look at the macro picture. In the last 10 years, billions of new consumers in developing and emerging market countries have come on line and had a taste of something better. We'll have to wait for the financial system to right itself or be righted, but I think the odds are that the world economy will resume its dramatic upward growth. That is the foundation of investing in the stock market and, for me, in dividend paying stocks.

Cheers
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Postby 2 yen » 31 Dec 2008 23:01

Sensei....I think you are on track. If the companies you own cut dividends, then the whole outlook for the economy will be so dire that it won't matter. Also, I believe you mentioned that you plan to continue working. If so, that is further insurance against any cuts. My advice to you would be to put the portfolio to bed, check it once a month only and let those dividends roll in. You have obviously done your homework. In my case, I want to protect dividend income so have put in what could be called stink bids that will purchase further dividends after dividend cuts of 50% to the companies I feel are most vulnerable to cuts, but that I would still want to own. My bids are as follows: BMO at $20, BNS at $25, TD at $33, RY at $28, and COS.UN at $12. I fully expect COS to cut to $1.50 this month. I will not add to companies like RUS, MFC, CM, REI.UN, or CUF.UN. If the markets are right, BMO and RUS are the most likely stocks I own to cut. Their yields are wild right now. Have a great and profitable New Year. Akemashite Omedetougozaimasu! :)
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