4) As a dividend investor, I focus my energies on individual stock selection and then building a diversified portfolio of income generating stocks over a long period of time. I focus on individual securities, how they earn money, check for competitive advantages. In this analysis I focus on catalysts that could provide these companies ways for earnings growth and dividend growth. After that, I focus on purchase of these securities at attractive valuations. I also balance the expected future growth in earnings and dividends, against the quality of earnings and business, and against valuation I am paying for this growth and quality.
Some businesses such as Coca-Cola (KO) and Johnson & Johnson (JNJ) have strong predictability of cash flows and strong pricing and earnings powers. These are the types of businesses that manage to build a record of fifty years of consecutive dividend increases. Because I have a long-term investment horizon, I do not care if interest rates go up or down over the next five years, as long as dividends from my portfolio are higher than today for the next 30 years.
In other words, if Realty Income (O) yields 6% today, but grows distributions by 4% over the next 20 years, I would gladly choose it over Treasury Bonds today. That is because in 20 years, even if you spend all your dividends each year, your yield on cost will be 12%. With US Treasury Bonds, you are stuck with the yield on cost you lock in today, for better or worse. Think about that, and think probabilistically, the next time you make an investment.
In conclusion, I believe that investors should develop a method of independent thinking and ignore short-term noise that has no relevance to their positions. If you have a set of solid investment guidelines, which describe your objectives, what securities you are looking to purchase and at what price, how to evaluate them and when to sell, you should be able to perform well over time. This set of basic guidelines will provide the opportunity hold on to your investment portfolio during any set of varying economic, market and business conditions that you will experience over your investing lifetime.
Full Disclosure: Long O, KO, JNJ