Dividend Investing

This discussion is consists of 2 sections (1) Mindset and (2) Approach

1. Mindset

1.1. General Investing

When you start dividend investing, growth investing, value investing, passive investing, real estate investing or any other style of investing, no matter what you do there will alway be a group of people that disagree with your style of investing and deem your style as inferior. They will have their arguement and logic to back it up.

The issue with these different contradicting information blast at you when you go online can create alot of confusion and doubt when you are trying to figure out what path for your investment.

Different style of investing have their own merit, may it be value, passive, growth or dividend investing, all of them is going to make money over long period of time. So i feel it does no good to actively discourage people for doing things they prefer.

1.2. Why dividend matter?

When you look online about dividend investing, you will soon find people telling you "Dividend don't matter". The main arguement is based on the Dividend Irrelevant Theory. The theory states when a company pay dividend, the company will become less valuable and the fallen in value is equivalant to the amount of dividend it pay. Basically, the theory had make some assumptions that is not true in reality.

While looking at Berkshire, why would Warren specifically negotiate for a higher dividend yield than the common shareholders again and again, when dividend dont matter and he can get the value just by selling the company, according to the theory? Is this actions that somebody that treat dividend that doesn't matter? Dividend obviously is one of many consideration factor, not the only one, there are whole lot of other factors to be consider.

Also in Berkshire's 2012 investor letter (pg.21). He think dividend is a sensible and understandable approach and he like increase in dividend. Warren Buffet definately does not think dividend is irrelavant. A good company should alway find way to returns value back to the investors may it growing their buisness, share buyback or dividend.

https://www.berkshirehathaway.com/letters/2012ltr.pdf

From Peter Lynch, (:1.01) Dividend do make a difference.

https://www.youtube.com/watch?v=UQ6cz63BNrU

When a company decide to issue dividend, it gives investors an Expectation for the company to continue to grow the dividend and this lead to management decisions making very different from non-dividend paying stock, they have to consistently increasing their cashflow. Because if they cut the dividend company's stock price will be punished.

Other than looking at what people are practising, we can also look at historical peformances. Study shows companies that grew or initiate dividend have experienced the highest returns relative to other stocks since 1973 with significant less volatility. There are many other studies online that show dividend paying stocks outperform the index over long period of time.

https://www.hartfordfunds.com/dam/en/docs/pub/whitepapers/WP106.pdf

In addition, market don't always go up, during bear market or market stagnation. You will continue to have positive returns through dividend. So far market had been very kind to investors for the past 10 years. Many had claim to be a long term investors, however if the market go sideway for 80 years, like in the past, physcologaically it will be painful to watch if you are holding all the non paying dividend stocks. How many can really hold that long? During bull market growth investors will feel like genius, during bear market dividend investors will feel like genius. The key is to stay diversify in a meaningful way.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3050736

1.3. Why some dividend investors fail?

The reason most people fail is because they give up what they want the most for what they want now. People first get into dividend investing because of having passive income flowing in without having to work for someone else.

However, when they heard their friend making massive gain in some meme stocks or meme coin, they decide to switch gear to get involve in get rich quick method. Because people love to compare and often feels the needs to beat the market this leads them to engage in riskier assets to earn a quick buck and often ignoring the equally potential huge downside and get burn. The needs of immediate gratification prevail over delayed gratification of massive dividend snowball. To win in the market you need to keep investing

Many time dividend investors quit because of the misalignment of estimation. Overestimate where they can be in a few months and underestimate where they can be in a few decade. Successful dividend investors will have goal to keep them motivated and on track.

2. Approach

There are mainly 2 approaches in dividend investing each have its pro and con, also different things to be consider.

2.1. Dividend Growth Strategy

2.1.1. Pro

• Over long term, usually 20 years, the dividend income will exceed high dividend strategy
• Relatively safe as companies who are able to consistent increase their dividend growth year over year are usually stable.

2.1.2. Con

• Starting dividend yield is very low, usually less than 3% p.a.

2.1.3. Things to consider

• Dividend growth - Long term track record of dividend growth history. This will most probably lead to concentration in more mature and big cap companies.

2.2. High Dividend Yield Strategy

2.2.1. Pro

• Very high starting dividend yield (more than 5%) able to rack up massive dividend income in relative short period of time

2.2.2. Con

• Higher risks of major dividend cut
• Over long term, it will underperform the dividend growth strategy

2.2.3. Things to consider

• Dividend substainability - Dividend are not guaranteed, you have to check the consistancy of the payout.

• Dividend trap - High dividend doesn't equate to a company's financial health. Is important to understand the distribution trend and stock price trend. Company may lure investors in using high dividend.

2.3. Which strategy is more suitable for me?

If you have very long timeline (more than 20 years), dividend growth strategy should always be the default. However, if you have less than 20 years, you may want to consider adopting both simultaneously. While emphasis more on high dividend yield strategy during initial stage to rack up an "acceptable" amount of passive income and later on more on the dividend growth stocks.

2.4. Typical example of DPU trend.

Below shows an example of a dividend growth stock DPU trend (parkway life reit), High dividend DPU trend (capitaland china trust) & a dividend trap (lippo malls retail trust). Although LMRT and CCT have the same % dividend yield but the amount of DPU of LMRT is at a decline.

2.5. How to check the DPU trend myself?

You may extract the data from yahoo finance.

1. Go to Historical data
2. Select Dividends only
3. select Max
4. Click Apply

5. Click Download. And the data will export to Microsoft Excel and you can now plot the chart.

2.6. Factors

This section explore 3 factors that will influence the portfolio value and dividend receives. We will be using Microsoft Excel to simulate what will happen if we invest $1, with dividend reinvested, over 25 years for these 3 factors. This is to identify what a general characteristic of a good dividend stocks should have.

The 3 factors are as follow:

• Dividend yield
• Dividend growth rate

• Stock price growth rate

2.6.1. Dividend yield VS Dividend growh rate

Assumption: All stock price remain constant

Blue line= Initial dividend yield 3% p.a. With dividend growth rate 8% p.a.

Red line= initial dividend yield 7% p.a. With dividend growth rate 0% p.a.

The red line is representing Fixed income instrument (bond)

Results: In shorter term (usually less than 20 years) High dividend yielding stock perform better. However, in longer term dividend growth rate is a more important factor.

2.6.2. Stock price growth rate

Assumptions: All stock have initial dividend yield 3% p.a. With dividend growth rate 8% p.a.

Blue line= stock price grow 5% p.a.

Red line = stock price increase 1% p.a.

Results: A dividend stock with a lower growth will have a better performance. Mainly because with the same amount of dividend reinvested you are able to accumulate more shares. This in turn will result in more dividend in the future. This is the reason during bear market & stagnation, a dividend portfolio will be more resilient.

3. Conclusions

• Different investing styles have their pro and con. Same for dividend investing.
• No matter which style you choose, there will always be a group of people disagree with you, because they cant stand people with different ideas.
• The other extreme is when youtubers telling you dividend investing is the only way of investing.
• Dividend investing is just a strategy. Some people may deploy one, two or multiple strategies in their portfolio.
• In my opinon, when constructing a portfolio, it should be timeless, regardless of your age and market conditions, you should always be profitable.

• The most important thing is to have an unbias, factual understandings of a strategy and the strategy should suit YOU.