Dividend Growth Investing is my preferred investment strategy. I’ve used this strategy extensively to build up my own dividend income stream over the years. However even more beneficial than the passive dividend income which I have been able to accumulate, a focus on dividends has enabled me to reduce several bad investing habits.
Avoiding buying high and selling low
Negative reactions from Mr Market typically send investors scurrying for the exits. During the depths of the declines in 2009, investors were abandoning stocks and heading for the safety of bonds and cash. Dividend stocks were not spared during the declines.
Dividend stocks were not spared during the declines. Many of the most stable dividend payers, such as The Coca Cola Company (KO) and Colgate Palmolive (CL), also experienced significant declines. Coca Cola fell almost 25% during 2008, while Colgate Palmolive was down some 10%.
The declines in the stock prices of both companies were not indicative of any problem in either of the underlying businesses. The operating cash flow of both Coca Cola and Colgate Palmolive actually increased during the 2008-2009 period. In Coca-Cola’s case, operating cash flow increased 8% between 2008 and 2009, while for Colgate operating cash flow increased almost 45%.
If you are interested in reading more of my article you can find a link to it here at Seeking Alpha.
Good topic for passive income. What can you say about dividends coming from Microsoft, Intel and Johnson & Johnson?
MWD, The 3 businesses you point out are interesting ones (MSFT, INTC and JNJ), because they are businesses in transition to varying degrees. Microsoft and Intel are both trying to transition to Mobile, JNJ away from pharma into medical devices. As they are all dividend paying stocks, you still get paid to hold on while they complete their transitions. The stock market may not reward them, but you still derive significant total return while you wait.
I wouldn’t mind another recession, although it’d be hard for everyone. I missed out on investing fresh capital during the last one so I didn’t get to pick up the steals that the market was giving us. I’ll be ready when the next one comes around.
JC, Its always tough to go in with guns blazing when everyone else is running away. I was lucky enough to pick up a bunch of bargains during the last recession, though still not as many as I would have liked in hindsight. AXP @$12, CAT @ 32 were probably 2 standouts. I think at a minimum, making sure you dont sell what you have at a bargain price is itself a good start, even if you can’t invest fresh capital.
I think if you are a dividend growth investor, you do not care about the drops at all. Why waiting for xx% drop to get out of the stock (your mental stop loss level) to rush into safe investments such as bonds, when such selling may actually be already low. If the company is a good company and most of the dividend growing companies are, they will not stay long on such depressed levels and recover soon. Selling, although holding losing position for sometime may be uncomfortable, during drops like the one in 2008 is a nonsense. Be a buyer.
I agree Martin. Frankly as the stock drops and the yield goes up, I just get more and more tempted. Companies like Coca-Cola, Clorox etc will just continue doing what they do and selling what they sell irrespective of market conditions. If the market wants to gift you these businesses, its up to us to say thank you and accept them!