A previous post highlighted an investment
selection process you might consider if you’re thinking about farming
dividends. It’s helpful to understand
the investing style or philosophy you want to follow before you delve into a
specific process.
Below are several items for you to consider as an
investor. How you relate to each
individually and in aggregate help shape your investment style which influences
any process you decide to use in selecting investments. In general, you should align these factors as
much as possible before you move down the investment path.
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| Dividend Cash Flow |
Risk Tolerance: Your propensity to tolerate risk influences
your investment path. You may wish to
think otherwise, but over long investment horizons, risk tolerance misaligned
with investing style isn’t sustainable.
In such situations, you can experience a level of cognitive dissonance
seriously affecting investment performance.
For instance, fancying yourself an aggressive growth investor because
that’s the style du jure, when you’re averse to high levels of risk, may leave
you financially and emotionally exposed to losses from which you can’t recover.
Desired Return: The rate of return you desire from your
investments also influences your investing decision. High rates of return often correlate with
higher than average investment risk.
Consequently, desired return is frequently married to risk tolerance
when weighing investment styles. If you
wish to double your money in 12 months, you’ll likely have to take outsized
risks to do so. If you can’t tolerate
that kind of risk, your desired return of twice your original investment within
a year isn’t practical and should be reevaluated.
Ability to Learn: If you stop learning, you stop growing. If you stop growing, you start dying. While the universal truth of this statement
may be argued, it’s often true enough of investing that you should pay
heed. Investors, whether passive, value,
growth, technical, fundamental, or any other, who fail to continuously learn
lock themselves into yesterday’s investing environment while today’s ecosystem
quickly marches forward. Imagine using
computer technology from 1998 to run your business in 2018. Failure to upgrade and retrain on new systems
means a competitive disadvantage to your firm.
Failure to upgrade, retrain, refresh, and continually expand your
investing knowledge leaves you at a decided and dangerous disadvantage. Do you need to be aware of all the latest
advances in technical analysis or high frequency trading? No.
Should you keep abreast of economic, industry, and business trends? Yes.
Business Interest: Many investors don’t consider their interest
level when deciding when, where, or how to invest. It’s just something people “do” because their
parents did it, they’re required to do so through a company plan, they feel it’s
necessary for social acceptability reasons, or they fear destitution in
retirement. None of these constitute the
type of business interest needed to be a successful investor. Rather, business interest means being
genuinely interested in business at some level.
If you’re not, you won’t take the time to learn, even if you’re
eminently capable of learning all that’s required.
Time Horizon: The single largest determinant of investment
success is time. The more you have in
which to invest, the better you’re likely to do. Whether you’re looking at the long-term trend
of stock markets or considering the strength of compound
investment growth time is your friend.
As with friends, time should not be taken for granted nor its benefits
wasted. Invest as early as you can. Continue investing regularly along the
way. Keep at it for the duration. If you do, you can generate a substantial return
over time, irrespective of your investment style.
How do these considerations fit within the Dividend Farming framework?
Cash Flow vs Value
Appreciation: The Dividend Farmer focuses on cash flow. As with agricultural farmers, it’s better to
harvest crops on a regular basis while working continuously to grow the crop
yield. Having your land appreciate in
value is nice, but you can’t pay the bills with appreciated land unless you
borrow against it, which adds additional risk and increases your costs, or sell
it, in which case it’s no longer yours.
The same holds true for dividend farming. The goal is to be able to harvest as needed
while growing the yield over time. The
best part is that if a dividend harvest isn’t needed at a particular time, the
yield can be reinvested to gain more “ground” along the way compounding your
return.
Risk Tolerance: Dividend farming takes a value investing perspective,
like Benjamin Graham and later Warren Buffett.
Consequently, it’s fairly risk averse.
If you can tolerate high levels of risk, particularly over extended
periods of time, you may find other investing styles a better fit.
Desired Return: Dividend farmers are concerned with steady
and predictable if unspectacular rates of return. While farmers enjoy bumper crops, they’re not
enthusiastic about a bumper crop in one year followed by drought and pestilence
the next. As a result, shouldering higher
than average levels of risk to obtain a significant rate of return isn’t of
interest to a dividend farmer. Instead, one
should focus on the continuous compounding of the investment crop to do the
work while maximally leveraging time. Downside
is minimized with the approach. However,
the possibility of enormous, newsworthy rates of return are normally given up. Dividend farmers are ok with that.
Ability to Learn:
Farmers are always learning. The science of farming, weather, technology,
and markets never stop and neither do they.
The same goes for Dividend Farmers.
If you’re not regularly reviewing your investments and their activities,
learning about markets, or trying to understand the events that influence your
investments, you’re limited to serendipity for investment successful.
Business Interest:
In line with ability to learn is business interest. Nearly everyone is capable of learning. We learn something new nearly every day. However, business interest means channeling a
portion of those learning capabilities into the investing arena. If investors aren’t interested in learning
about their investment style, their investments, or the market in general, they
will not develop the knowledge base to be successful. In such situations, throwing a dart at a
board may be the best an investor can hope for unless he’s willing to put all
his trust into an investment advisor.
While this is not inherently a bad thing, dividend farmers are DIY types. If you’re not, then farming dividends may not
be the path for you.
Time Horizon: Time
is the single greatest factor affecting investment success. In total, it’s more powerful than savings,
selection, or happenstance. It offers
new investors the chance to learn without causing unrecoverable investment
problems. Time allows investments to
compound taking advantage of one of the greatest powers in the investment world
– compound interest. Risk mitigation
through time to reach desired investment goals becomes possible. Doubling your money in 12 months requires a
great deal of risk, but doubling it in 10 years requires a 7% return which is
roughly the average long-term rate of return of the stock market.
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| Dividend Tree |
Dividend farmers employ time to achieve their
investment goals. The best way to maximize
time time is to start early. It’s been
said the best time to plant a tree is 20 years ago. The next best time is today. Don’t wait, plan a dividend tree today.
The
thoughts and opinions expressed here are those of the author, who is not a
financial professional, and should not be considered as investment
advice. The information is presented for consideration and entertainment
only. For specific investment advice or assistance, please contact a
registered investment advisor, licensed broker, or other financial professional
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