Thoughts on starting a new portfolio – Part 4 – Why we prefer dividend investing for the Core of our portfolio?

In our last post, we discussed why entry price is important for a dividend investor. But does it mean that we are advocating timing the markets?
The answer is Yes, and No.
Yes because if one can time the markets, there is nothing like it. If one buys stocks of a good company trading at low valuations, the stock (generally) cannot go down much lower as it may already be at levels which are close to what it would cost an acquirer to pay for it. The problem with high multiple stocks is that future growth is already accounted for in stock prices. This implies that long term investor could likely see little gains even if the earnings grow over time.
No, because markets are supreme and trying to beat the market is an illusion. Though people like Warren Buffett have done it, the fact remains that we are not Warren Buffett(s).
After our last post, it became obvious that we shall be using Dividend Investing to construct the core of our portfolio. The proportion of core to that of overall portfolio is still under discussion. In this post we would like to give reasons about why we want to use the Dividend Investing approach.
One of our heroes, John D. Rockefeller once remarked – “The only thing that gives me pleasure is to see my dividend coming in.” And dividends are what give us pleasure too. We just love dividends! So without any further delay, here are our reasons –
Our Real Reasons J
  • It is easier to sit, relax and wait for good companies to share their profits, year after year, with additional potential of capital appreciation. Though capital appreciation may not be at rates comparable to high growth companies. This can be attributed to our laziness  J and inability to do comprehensive equity analysis.
  • We prefer picking stocks of companies which are ‘so-obviously-good’ on parameters of safety, stability & growth, that we don’t need to analyze them much.
  • Evidence of profitability in form of dividends helps us sleep easily. Profits on paper say one thing about a company’s prospects and profits that produce cash dividends say entirely another thing.
  • We hate selling stocks! And to a large extent we agree with concepts of value investing. One of the concepts of value investing tells us to buy stocks to hold it forever. Our question is that, if we do not sell our stocks, how are we going to make money on a regular basis?

Text Book Reasons we agree with

  • A company’s willingness and ability to pay steady dividends over time – and its power to increase them – provides good clue about its fundamentals. We are still on a lookout for a database of Indian stocks or a tool, which lists out stocks that have consistently increased the dividends year after year (Just like S&P’s Dividend Aristocrats of US markets). If you know of any such tool, please let us know.
  • Dividends signal sound fundamentals and typically, it’s mature and profitable companies that pay dividends.
  • Dividends bring more discipline to management’s investment decision-making. Holding onto profits might lead to excessive executive compensation, sloppy management, and unproductive use of assets. Studies show that the more cash a company keeps, the more likely it is that it will overpay for acquisitions and, in turn, damage shareholder value. In fact, companies that pay dividends tend to be more efficient in their use of capital than similar companies that do not pay dividends.
  • Value investors always like to buy shares forever. When a value investor buys a blue chip stock they are most certain that the financial stability of the company will ensure regular dividend payouts. A blue chip stocks will ensure that you are earning regular streams of income in the form of dividends. This dividend payout will only increase with time as the company grows and its profits also grow. So if one is making healthy income (which is also increasing) from current holdings then why will one sell his shares? Hence value investors prefers to hold share forever. Dividend focused investment (in blue chip stocks) is also like a risk-free investments like bonds, bank deposits etc. So not only dividend based investment is profitable in long run but also offers returns with minimum of risks. As the volatility of the market price of stocks will not affect your earnings, as an investor, one will feel very secure. The only thing that one needs to keep a track of is the companies’ business fundamentals (which will ensure dividend payouts). Volatility is not one’s concern. Let bloody(!) traders worry about stock index fluctuations, you can rest in peace even in the most turbulent of times in the market.
To conclude we would say that investing with focus on dividend yield & payout ratios is one of the safest and one of the more profitable forms of equity investment.
Note – Some parts of this post (Text Book Reasons) are adapted from Investopedia& GetMoneyRich.
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