Prices of stocks have increased a lot in 2013. As a result, many dividend investors are shunning purchases,citing high stock prices. This means that they are not reinvesting dividends and keeping any fresh portfolio contributions in cash. The issue with this strategy is mostly psychological.
These investors are hoping for a correction, that would make investments affordable again. They believe that they are better off waiting for better prices, rather than buy shares at or above the maximum prices they are willing to buy at.
First, an investor can easily afford to wait for attractive valuations. However, it would be difficult to hold on to your cash when it earns practically nothing, but the positions you had set your sights to balloon in value, increase distributions and enjoy rising profits. From a psychological point, you might admit defeat at some point, which unfortunately could be too late.
In general, individual investors are really bad at timing market moves. As a group, they tend to sell near bottoms, and finally give up and buy at the top. This is why most individual investors are better off simply buying and holding stocks, and not making many investment decisions.
Second, because I doubt I am good at market timing, I simply try to allocate my cash at the best valued companies at the moment. I find these best companies by looking at dividend streaks, historical earnings and dividend growth, competitive advantages and existing portfolio positions. Once I have cash on hand, I try to purchase best values available, by taking into account valuation, prospects, and portfolio weights. I therefore try to buy shares every month or so. I do search for values, and although could sacrifice on a dividend streak or minimum yield, I would never sacrifice on quality and valuation. As long as I can find bargains, I would keep doing so.
For example, during the late 1990s, many quality dividend growth stocks such as Coca-Cola (KO), Wal-Mart (WMT) and Johnson & Johnson (JNJ), became grossly overvalued. However, astute dividend investors could have found attractive values in REITs, financials and energy for example. In addition, there were pockets of opportunity from time to time in sectors that temporarily went out of favor such as tobacco for example.
Third, I try to allocate money whenever I get them, because I do not want to miss out on the power of compounding. In theory, I could wait until the perfect price. In reality, I could end up missing out on the perfect price for a long period of time. Therefore, my money would not earn anything for me.
For example, assume that my entry criteria requires to invest in a company yielding 3% in real terms. However, I could only find companies yielding 2%. What if I decided to put my money to work at 2%, but I could not find any 3% yielders for five years? It would take ten more years for an investment at 3%, to reach out the same amount of net worth as the 2% yielding one.
However, if you had a high allocation to cash in 2007 – 2008, you might have been able to deploy it very well at attractive valuations. Many otherwise quality companies were selling at ridiculouslylow valuations during this tumultuous time period. The risk of having too much cash however is that it might have been deployed too quickly, at the beginning of the crisis, rather than slowly
In the present market, I find some great companies at low valuations, which unfortunately have imperfections. These imperfections are mostly low streak of dividend increases and low yields. I would hate to start breaking my rules on a more consistent basis however. This might be risky as I might end up overpaying in hindsight or buy something I should not have touched in the first place. I could overpay in hindsight if I purchase a cyclical with a low P/E, whose earnings decrease precipitously and then stay there. This could be the cause with many commodity companies. The list of companies that currently fit my entry criteria is dwindling as we speak, but unfortunately many of these are companies I already have a very high concentration into.
At this time, one of the cheapest sectors is oil and gas services. The three energy companies to consider today include: