I was recently away from home for a two week period. During the time, I did not have the opportunity to check email or look at my dividend stock portfolio.
The first thing I did after coming back was log on to my brokerage accounts. I noticed that everything had gone smoothly and I had more in cash than before. This should hardly come as a surprise to most readers – dividend investing is a low key, low activity process. It does not involve staring at a computer screen for 8 hours a day nor does my portfolio require tinkering every day, week or month. Most of the dividend stocks I tend to purchase are held as long term investments. Heck, even if I don’t do anything with my dividend for a couple of years, I highly doubt my portfolio income will be affected.
I am mostly a buy and hold dividend stock investor. I tend to purchase companies, which have a quality product or service that is valued by customers, and which have been able to deliver dividend increases for at least one decade.
Most of these companies, such as McDonald’s (MCD) or PepsiCo (PEP) tend to remain in the same lines of business for years, as they have the expertise and know-how to keep existing activities and also continuously improve in order to stay competitive. Even five or ten years from now, both companies would still be performing essentially the same things they are doing today. These strong brands are synonymous for quality and consistency of product/service, which is why consumers are willing to pay up.
This translates into strong pricing power that enables companies to remain profitable, and pass on cost increases to customers, while retaining and even increasing profitability. Most such companies also tend to sell their products on a global scale, which ensures that they are not overly dependent on a single marketplace. Because these dividend stocks tend to have a stable, predictable business models, and because they have a diversified income streams coming from countries around the world, they tend to deliver dependable earnings and thus afford to pay dependable dividends to shareholders.
By owning dividend stocks with consistent earnings, I tend to generate consistent dividends every quarter. I typically let distributions accumulate in cash and do not automatically reinvest them. However, once the amount of cash reaches $1,000, I tend to initiate or add to stock positions. I only tend to reinvest dividends in companies that are currently attractively valued, and whose prospects appear bullish. In other words, if my analysis indicates that a company has a decent chance of increasing earnings and dividends over time, and it is attractively priced at the moment, I would consider allocating any excess cash I have.
This excess cash could be from dividends I received, and need to reinvest, or from new contributions. I do not automatically reinvest dividends, because I do not want to invest in companies which are overvalued at the moment, even if they have great long-term prospects.
The frustrations of millions of US investors over the past decade, also referred to as the lost decade for US stocks, were primarily caused by excessive valuations in 2000. Even some solid companies such as Johnson & Johnson (JNJ) or Coca-Cola (KO) were overvalued in 1999 – 2000, which led to poor total returns over the next decade, despite the fact that their underlying businesses were growing.
The positive factor for owning quality dividend stock companies is that they tend to generate solid increases in dividend income, coupled with solid total returns.
Another positive is the ability to compound income and total returns over time. Companies such as Johnson & Johnson, Phillips Morris International (PM) and Casey’s (CASY) have been able to create strategies for increasing earnings, and then executing them. This has led to higher earnings and trickled down into higher distributions. As a result, investors who meticulously reinvested distributions at attractive valuations were rewarded by the amount of reinvestment plus the increase in distribution.
As a result, they had effectively managed to turbo-charge their dividend compounding. The fact that earnings are growing, also makes the underlying businesses that dividend investors have put their hard earned money in, even more valuable. As other investors realize the extra value for the dividend paying company, they tends to deliver solid capital gains in the process as well.
This icing on the cake also protects the purchasing value of the investment portfolio against inflation.
Full Disclosure: Long MCD, PEP, KO, JNJ, CASY, PM