Dividend Farming and Mr. Market

Benjamin Graham, father of value investing, characterized the stock market as an individual named Mr. Market.  Mr. Market would look at companies available and in many cases arbitrarily value each based on how he felt that day; by what his mood dictated.  On a given day Mr. Market would be manic, depressed, or anything in between – save logical.  Mr. Market is a financial mood ring.

When dealing with Mr. Market, the intelligent investor is consistent, logical, and studiously avoids the histrionics of Mr. Market and his emotional swings.  Mr. Market’s antics are largely uncontrollable by the typical investor.  However, per Graham, the savvy investor can control the following:

Brokerage costs – trade infrequently and at low cost.

Ownership costs – avoid mutual funds and investments with excessive annual expenses.

Internal expectations – diligently forecast based on facts and realism, not bandwagon motives.

Risk – mitigation through sound diversification.

Tax bills – hold stocks at least 1 year and preferably 5 to reduce capital gains rates.

Behavior – be wary when following the masses for sometimes the “m” is silent.

As Jason Zweig noted in Chapter 8 of Graham’s Intelligent Investor, “The whole point of investing is not to earn more money than average, but to earn enough money to meet your own needs.”  Meeting your needs while not worrying about the market is the essence of Dividend Farming.  As a Dividend Farmer, you can “put in place a financial plan and a behavioral discipline likely to get you where you want to.”

Ben Graham dryly notes, “The intelligent investor will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.”  This statement is a core precept of Dividend Farming which addresses the controllable factors noted previously.  Dividend Farming helps control:

Brokerage costs by keeping them to a minimum buying and holding dividend paying stocks rather than feverishly day trading.

Ownership costs which are reduced since dividend reinvestment plans rarely carry management fees.  Furthermore, dividend stocks allow you to reinvest your dividends with no brokerage fees further reducing ownership costs.

Internal expectations that can be positioned in your favor by looking at the history of dividend payments.  While past performance is no guarantee of future success, any firm paying dividends for 25 years or more will fight strenuously to protect and grow that dividend record.  Such focus means stability of operation is critical to the company and helping reduce the risk inherent in forecasting.

Risk is limited through sound diversification as discussed in this diversification post.

Tax bills are minimized through the buy, hold, and grow strategy of dividend farming.  Some dividends may be taxed as ordinary income, but much of your growth falls into the capital gains bucket taxed at a lower rate.

Behavior inherent in dividend farming focuses on the time, care, and compound growth of a crop.  This kind of attention is a great way to curb the excessive and often rash behavior of Mr. Market.

Intelligent investing is more than brains, it’s character. Former Senator Dan Coats said, “Habit is the daily battleground of character.”  Dividend farming pursued diligently provides the habit supporting the character necessary for successful, long-term investing helping reach your financial goal.

The thoughts and opinions expressed here are those of the author, who is not a financial professional.  Opinions expressed here should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.