Wednesday, April 24, 2013
Dividend Investing For Beginners
I realize that there are some people who have found my blog recently for the first time. I've been receiving some emails from readers asking for information on how to start out dividend growth investing and really where to begin. This is important information, and it's a shame I haven't really covered this before.
Sometimes I get into some pretty technical jargon here on Dividend Mantra, even though I purposely try to keep everything pretty simple. I'm a simple guy with a simple job and I believe that simple investments work best. And that's really why I love dividend growth investing: some of the best companies in the world have really simple and easy to understand business models. But, nonetheless if you're just starting out some of this can be pretty overwhelming. So, today I'm going to get back to basics and recommend some fantastic reads to get you fully acquainted with what us dividend investors are trying to accomplish.
I only put my money where my mouth is, and as such I'm going to recommend resources I've personally used.
First, there are a few great books that provide a great education on the basics of dividend investing and why it can be such a superior strategy.
First up is The Dividend Toolkit by Matt Alden (the blogger behind Dividend Monk).
*This book is really fantastic. I did a review a while back, and my review doesn't really fully give this book its due. It's a phenomenal read that covers the basics of businesses, the importance of fresh capital, the impact of dividends on long-term returns and why it's important to seek out high quality businesses that distribute them, how to properly analyze/value businesses and a summary of how different sectors (consumer stocks, industrials, MLPs, REITs, etc.) are valued differently. This book is not only a great resource on dividend growth investing, but also on building wealth in general.
Next is The Ultimate Dividend Playbook by Josh Peters (an editor for Morningstar).
*I've read most of this book and feel very comfortable recommending it. Josh writes in a very easy manner, and this book covers a lot of the basics. He explains why dividends matter, revealing how dividend paying companies tend to deliver superior returns over the long haul. He also talks a little about why shareholders benefit by receiving dividends, and it's not just for the income aspect. His 'Dividend Drill' focuses on valuation in terms of future expected return (gordon growth model), safety of dividend (how well is it covered against earnings and cash), and the likelihood of the dividend continuing to grow over time (can the company continue increasing earnings).
Finally, we have the The Intelligent Investor by Benjamin Graham.
*Although not a dividend-specific book, this is probably the greatest book ever written on investing. I believe the main draw to this book, and really the crux of it, is that it covers the psychological warfare that investing can sometimes bring on a person. It covers emotions to the point where Mr. Graham actually refers to the market as a whole as a bi-polar "Mr. Market" that acts irrationally and emotionally. An intelligent investor takes advantage of these emotional swings. It covers equities as a whole, how and why one should invest, investment theory, achieving a margin of safety, market fluctuations and valuation methods all in great depth. I've read this book and could read it again tomorrow and pick up new things I didn't see before. It's that meaty and deep. To do a true review on this book would require multiple blog posts dedicated to nothing but. If Warren Buffett believes this is the best book on investing ever written, who am I to argue?
After reading these three books I feel confident that you will have a solid foundation of knowledge on why it's important to invest, how investing works, why dividends are such an important component of total return, how businesses operate, how to analyze and value businesses, how to evaluate the safety of a company's dividends, the likelihood of dividend increases and how to intelligently allocate capital without letting your emotions run wild.
Further, there are a set of great blogs out there that provide real-time, ongoing information on dividend investing that can't quite be replicated in a book. One of the reasons I love writing this blog (versus a book) is that it's live and in the now. Businesses and the stock market are almost organic in the way that they're swaying to and fro, and live blogs are a great way to capture that ever-changing motion. Stock purchases or sales can be recorded within hours or days, new analyses can be published and viewed at any given time and business fundamentals can be viewed and discussed as they change over time.
Dividend Growth Investor constantly updates his blog with analysis on dividend growth stocks, general market information, when to buy and sell dividend growth stocks, why valuation matters and specific dividend growth stock ideas.
Dividend Ninja runs a Canadian dividend investing site that gives you a Northern flavor to this investment strategy. He often gives readers great information on Canadian dividend stocks, why it's important to stay diversified between asset classes, what he's buying, why high yielding stock should typically be avoided and also has great interviews.
Dividend Monk is well known for his in-depth stock analysis reports that he releases for free. He also runs a fantastic monthly newsletter that typically focuses on certain macroeconomic trends, broad market valuation and specific stock ideas.
Passive Income Pursuit has a great series on different valuation methods and also frequently does in-depth dividend stock valuations. Like me, he also alerts readers to any recent changes to his portfolio.
The Dividend Guy is another Canadian dividend investing blogger. He has great articles on macroeconomic news and how it can affect your investments, the market and valuation and often runs screens for his readers which can spit out some great stocks for further research.
Dividend Growth Stocks is one of the oldest blogs focusing on dividend growth investing. The author, D4L, often reviews stocks with in-depth analysis, highlights stocks that are trading at attractive valuations and publishes his dividend income monthly. His dividend income is very impressive, as is his portfolio.
Although not a blog, another extremely important resource is the Dividend Champion/Contender/Challenger list compiled and maintained by the great David Fish. This is a spreadsheet that lists companies with dividend growth streaks ranging from 5-9 years (Challengers), 10-24 years (Contenders) and 25+ years (Champions). A really invaluable resource to dividend growth investors with not only the list of companies that have such streaks, but also important metrics like dividend growth rates, payout ratios, PEG (price/earnings growth) ratios, valuation metrics (P/E, P/S, P/B), estimated 5-year growth, debt/equity ratios and return on equity numbers.
I also read Seeking Alpha's Dividends & Income articles often. There are always new articles by a diverse collection of authors discussing earnings calls, specific stock ideas, stock analysis reports, investment theory, the dividend growth strategy and associated ideas. The real highlight and strength of Seeking Alpha is that it's a great community of like-minded investors all discussing ideas and engaging with one another.
I'm now going to include a great video I watched not long ago on the basics of business, including balance sheets, cash flow statements and income statements. Great visual breakdown and the language is very easy to grasp. Thanks Dividend Growth Machine for pointing this video out:
William Ackman: Everything You Need To Know About Finance and Investing in Under an Hour
Finally, I'm going to conclude with not so much a resource but more of a general theme. As I alluded to earlier, keeping it simple is one of the hallmarks of my life. Not only do I live a very simple, easy life where I've cut down on the endless pursuit of the latest and greatest everything, but I've also concluded that the best way to invest is similarly to stay focused on simplicity. You don't need to invest in futures, derivatives or binary options to make money.
If you're just starting out take a look around your house, your work, your family's homes, your friend's homes, your local city and your local businesses. What products do you see? What services do you see people using? Look for recurring brand names, machines, advertisements. Even someone who lives as frugally as I do still has to brush their teeth, and I use Crest (PG) or Colgate (CL) toothpaste. I shave my head and face with Gillette Fusion razor blades (PG). I drink Coca-Cola (KO) or Pepsi (PEP) products on a daily basis. I don't own a car, but my scooter runs on gas and so does the bus I ride. If I have a headache I'm going to take Tylenol (JNJ). I need electricity, running water and other utilities just like everyone else. I go to the grocery store and typically buy products made by General Mills (GIS), Kraft (KRFT), Unilever (UL), Nestle (NSRGY) and other global consumer product juggernauts. There are recurring themes in many products and services, and the key is to identify the highest quality of these companies that provide these products and services.
I hope this article helped any budding dividend growth investors out there just starting out. It wasn't that long ago that I was also just beginning my investment career and there were many before me that helped steer me in the right direction. I hope that in the comments section below further resources can be shared and discussed, as this was really only a starting point rather than a complete list of resources available.
Full Disclosure: Long KO, PEP, JNJ
Thanks for reading.
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