Time: A Dividend Growth Investor’s Greatest Ally

This article originally appeared on The Div-Net on December 22, 2011.

As a young (29, and counting) dividend growth investor, my primary ally is time. Time affords me the ability to commit investing errors, allows me flexibility and freedom in my general investment thesis and allows me the ability to compound my investment capital and reinvested dividends over many years. As a young dividend growth investor, there is no greater asset than time. If time is on your side, you have a very powerful tailwind indeed.

Let’s investigate how time can help a dividend growth investor.

Committing Errors

If you make an investment blunder, such as I did recently with my investments in Telefonica (TEF), time allows you to recalculate a position and start back over again. Even though I lost some money with my TEF investment, I still have plenty of time to invest those funds elsewhere and regain my losses. If you invest with a company and later realize that this particular company no longer fits in with your strategy you can likely move on and over time you will be better off for it.

If you lose $1,000 with an investment, time allows you to write off that loss, take your capital and grow it somewhere else. If you have 20 or more years of an investment career left the odds are good that $1,000 will be regained many times over. Of course, if you’re making massive leveraged bets that go sour it may take many years to break even. Even with plenty of time on your side I believe it’s prudent to invest with caution, stick to your long-term plan, invest in quality and diversify.

Flexibility

Time allows you to be a bit flexible in your investment thesis and strategy. For instance, I mostly invest in quality dividend growth companies that have sustainable competitive advantages, or economic moats, that grow earnings and dividends at a rate that outpaces inflation. These companies usually have entry yields over 2.5% and are available at attractive prices relative to their intrinsic value. Companies like PepsiCo, Inc. (PEP) and Johnson & Johnson (JNJ) come to mind.

However, because I’m still relatively young and have plenty of time left in my investment career I can afford to stray a bit from this strategy. I could invest in a company with an extremely low entry yield, due to either a higher price due to higher expected growth or the fact that it simply not a traditional dividend stock. Visa Inc. (V) comes to mind here. Dividend investors with a limited time horizon and in need of income would likely take a pass on Visa due to the fact that its entry yield is less than 1%. However, if you have a longer time horizon before you’ll need the dividend income to live on, Visa may be paying out a YOC of 10% or more by that time.

With plenty of time on your side you could also explore pure growth plays or high risk stocks. If the investment goes sour on you, this would be “committing an error” as discussed earlier and hopefully you could make up ground over time. I would make plays like this a limited part of one’s portfolio (under 5%), even if you have a lengthy time horizon so as to limit your loss potential.

Compounding 

Perhaps the greatest power that time has is compounding. Whenever I commit capital to a new investment, I plan on keeping that money invested for the rest of my life. If the company’s fundamentals change, then I roll with the punches and reevaluate my position. But, if the investment stays on track then the odds are good that over 20-30 years your initial investment is going to grow many times over.

To show you how powerful time can truly be consider that $5,000 invested into an instrument earning an 8% return annually will turn into $160,000 after 45 years. After only 10 years, however, that initial $5,000 still earning that annual 8% return will be only $10,800. The investment still doubled, but you can clearly see the effects of time. Time allows a small sum of money to turn into a very large sum if you feed it a healthy dose of patience. The preceding calculations did not take taxes or inflation into consideration, but are still illustrative.

In summary, I believe that one should always be prudent and stick to your plan. My plan involves generally investing in quality dividend growth stocks that have sustainable economic moats, a proven track record of growing earnings, revenues and dividends, and produce products that have enduring value. However, time allows someone even as conservative as me to stray from the track every once in a while and if one gets burned it allows you to learn from your mistakes. While experience pats you on the back and gives you a wag of the finger, time will allow you to get back on path and give your reinvested capital a gentle tailwind blow that over the course of many years will turn into quite a gust.

Full Disclosure: Long JNJ, PEP.

Thanks for reading.

Photo Credit: digitalart

Comments

  1. says

    For someone embarking on a dividend growth path, how would you recommend setting up initial positions?

    So in a completely hypothetical example, imagine an investor has $5K to commit, and 10 dividend stock ideas. Would you advocate investing $500 each in the 10 stocks (for diversification), or a larger amount in a fewer number (to keep transaction costs down)? Where do you think the breakpoint lies between the benefits of diversification and the added costs of additional transactions for multiple holdings?

  2. says

    That’s true. Only time will tell if what we’re doing will pay off. I think it will, however many people don’t. That’s okay! It’s best to go against the norm.

    By the way, your freedom fund is valued at $50,000 plus. Is that your cost basis or the market’s value of your investment? Just wondering, cheers!

  3. Anonymous says

    Well if you have only $5000 to start off with, you could open up a Etrade or TD Ameritrade ROTH IRA or a regular account. Both offer free equity trade commissions for the first 60 days of a funded account. You could purchase shares listed in Mantra’s portfolio at around $225 per holding.

    Or you could purchase shares commission free directly from the firms at a min of $250 to start.

  4. says

    The Executioner,

    Thanks for stopping by.

    There was a comment below yours that made some good points about free trades during a specified time after opening a new account with certain brokers. I would certainly take advantage of that if I was starting a new portfolio.

    I didn’t start all that long ago, so I feel I’m pretty familiar with just starting out and can definitely identify. Also, I earn a relatively average salary. If I had $5k today, and no free trades, I would probably put that on 4-5 individual positions and start buying monthly from there with maybe another $1k or so. That is pretty much what I did as my first purchases were made with appx. $7k when I started investing in mid-2010.

    The transaction fees shouldn’t keep you up at night, but be mindful of them. I have purchased shares in lots smaller than $1k (see my SYY holdings), but that was when I was first starting out and knew less than I do now. I would try to limit purchases to $1k or above to limit the fees from eating your future returns.

    Best wishes!

  5. says

    Henry,

    Only time will tell. I think time is on our side!

    The value of my holdings is based on current market value, not cost basis. I’d like to track more on that spreadsheet, but I can’t get it any wider without it not fitting on the page. Anyone looking to track my cost basis and performance can easily do so as I publicize every purchase and sale with my exact cost basis.

    Take care!

  6. Shean says

    “Time: A Dividend Growth Investor’s Greatest Ally”

    You said it right!! I remember I started quote young like in my early 20s when I invested on banks funds instruments. Very bad mistake. Paying them to pick stocks. Every year those funds should have risen 6-7% to cover the banks expense and inflation.

    For many years those funds have gone up and down. Then I accidently discovered investing forums in the Internet there I learned many things and started to think why I should pay them to do things I can do by myself.

    All I needed was to find broker and spend more time in the Internet and find more information about investing and so my “career” as Investor started around late 2007 in my 24s. It was good time back then and bad times came after it. Good thing that I was poor student that did part-time job so I didn´t have much money to spend on stocks.

    Later while I was on Internet readin Investment blogs, forums etc. I stumbled on term Dividend Champions and so another chapter in my career started. In bad times several companies have cutted their dividends but Dividend Champions have not. The reason is strong cashflow which I learned that it is one of the most important reason to pick any stock.

    My portfolio goes up and down because of markets trend and I sometimes do bad decicion and buy some stocks to trade :P. I only use dividends to calculate how well I´ve done.

    2008 550€
    2009 880€
    2010 1110€
    2011 1860€

    All those are after taxes. I’m proud that I could done so well. I come from not so poor but nothing extra family so I’m quote penny pincher that doesn´t smoke or drink. Having now good capital income I’ve started to think to go back to school and educate a new profession for me or buy an apartment.

    What are you stories how you got hooked on Investing and what are your goals in near future with those capital incomes..

    Don’t tell me you’re gonna fill your coffin full of 500 dollars ^^

  7. Nuno André says

    Dear Dividend Mantra

    I have recently seen your guest posting in MMM’s blog and never considered this kind of investment before, but it seems very appealing.
    Does dividend growth occur with normal stock or also with REITs?
    What is the safest way to know if a company will be paying dividends next year, would just a quick glance at Google finance be enough?
    I ask this, since in my country, Portugal, I have seen news about extra dividend being paid by top companies but never heard about dividend return from your stock as an investment.

    Sincerely yours
    Nuno André

  8. says

    Shean,

    Congratulations on starting your own journey and it sounds like you are off to a fantastic start!

    Keep us updated on your progress. I wish you nothing but the best, and may you prosper in 2012 and beyond!

    Best wishes.

  9. says

    Nuno,

    Thanks for stopping by! I’m glad you found me.

    As far are REIT’s go, there are many that have raised dividends for many years in a row. Realty Income Corp (O) is a popular REIT in the dividend growth circles because it pays monthly and has grown dividends for 17 years in a row. It has a fairly high entry yield as well.

    As far as knowing if a stock is going to pay dividends next year, it depends on the individual company’s directive and how often/how far in advance they announce dividends. Here in the U.S. most large-cap dividend paying companies announce dividends quarterly, so you’ll know when the next dividend is coming around.

    Best wishes! And keep in touch.

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