Dividend Growth Investing
In my own investment portfolio I have about half of my money
in the small to mid cap sector with a focus on growth stocks. The other half of
my funds are in dividend growth like vehicles which tend to grow their dividend payout over time. The stocks in this part of
my portfolio tend to be a little bigger but most of them still fall in the mid
cap space. The dividend growth part of
my portfolio provides stability to offset the volatility of the smaller growth
stocks I’m holding.
Dividend growth investing offers certain rewards but does require great patience as time is
the critical factor needed for implementing the strategy. Dividend growth
investing is based on the concept, ‘yield
on cost’. I’ll give you an example from my own holdings. I bought the
limited partnership, Brookfield Infrastructure Fund back in the summer of 2010.
Being a limited partnership they pay you in distributions rather then dividends
due to the structure of being a Master Limited Partnership. The payout that
summer was $1.40 per share. Since I bought this Brookfield holding they have raised the
distribution repeatedly. Presently I am receiving $2.28 per share on my
holdings, so my yield on cost is 10.23. Yield on cost is the return you are
getting on the book value of your original investment. In a world of low and
even negative interest rates, it is very re-assuring to hold an investment that
is yielding 10.23 on my original cost and this isn’t even considering the
capital gains I have realized from the appreciation of the underlying stock.
Some thoughts to bear in mind when a company constantly
raises their dividend over time…
An instrument that
produces income is valued based on the amount of income it produces and if it
produces more income, it is worth more, so not only do you benefit from a
rising income stream but the value of the underlying equity will increase over
time as well.
The management of a
company has to allocate capital to expand the business, and invest in research
and development so if on top of that they still have the money and the confidence
to pay their shareholders a rising dividend over time, its telling you
something good about the future of the business.
Management are
shareholder orientated in that they are returning money to their investors.
As the dividends are
paid out from the earnings of a company those earnings must be legitimate and
not doctored up in any way.
As a general investing strategy this is hard to beat and is
as good as any and probably better than most but it does take patience and discipline. You really have to buy into
the strategy hook line and sinker. And you have to believe in the companies you
are investing in over the long haul. To invest in this strategy you will certainly
have to extend your time frames and holding periods but that’s probably
good advice anyway due to the short term emphasis people put on the stock
market. Wager value again.
Douglas Kee is
one fund manager who appears on BNN’s Market Call talk show at times. He
specializes in this area of investing and is worth listening too.
A great book on this approach to investing would be The Single Best Investment by Lowell Miller.
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