Selecting my own stocks… I’ll screw it up, right?

The title states what may be the only thing standing twixt a satisfied DIY stock investor and a person who throws it over the fence to a professional.  Pundits, talking heads, and bold media headlines lead would-be DIYers to believe investing in stocks is rocket science or brain surgery.  It’s not.  It does require effort, but not as much as you think.

Bertrand Russel is recognized as making famous the phrase, “Men would rather die than think.  And most do.”  Dividend Farmers who are value investors and DIYers don’t subscribe to this perspective.  Like regular farming, Dividend Farming requires active participation; consistent and persistent.

An earlier post shared 10 Questions to help you build an investing philosophy.  A philosophy is a good framework with which to start.  Eventually we move from philosophical perspective to the active practice of selecting our first stock.  But how do we do so without screwing it up?

Benjamin Graham, the godfather of value investing offers advice about this in his work, Security Analysis.  In it he summarizes three hurdles investors face when selecting stocks.

First:  Overcoming inadequate or incorrect data.  As a pilot, the phrase, “Good information leads to good decisions,” quickly comes to mind.  Another way to look at is GIGO or garbage in / garbage out.  However you wish to view it, the first thing is to develop solid information.  This means reviewing company data from Yahoo Finance, your brokerage’s online tools, or similarly recognized and trusted sources.  This is the entry point of your selection activity and the first line of risk mitigation.

Dividend Farming: Selecting Investments provides a list of specific steps and resources you may consider in developing your selection information.  Posts about SO, GD, MSFT, UTX, GIS, and DE, offer examples about how information might come together in usable form.  However you do it, take the time to find a method for gathering adequate and correct data that works for you. 

    

Second:  Minimize volatility.  Companies with long records of stable earnings growth are likely to produce similar growth in the future versus companies with abrupt or large-scale fluctuations in market price.  Stable firms with strong histories are less likely to see serious declines as well.  This makes them less risky.  Dividend Champions are great options for minimizing risk and volatility.

 

Third:  Focus on the market weighing machine; not the voting machine.  Weighing a company means assessing its (intrinsic) value.  Voting a company is a popularity contest.  The second is meaningful in high school.  Not so when investing; unless you’re a momentum investor speculator.

 

Focus on value, not popularity.

Assessing a firm’s value usually means estimating the cash it can provide over time (dividends, for instance) and measuring that cash flow against the price the market has voted for the day.  Predicting future cash flows from stable dividend payers is easier than forecasting similar flows from companies with wildly gyrating earnings growth or no dividend payments.  You’ll find yourself focusing on weight versus popularity if you stick with stable dividend payers.

In each case, Graham tells us risk mitigation and margin of safety in our selection process is important.  Graham’s guidance offers a method for selecting our investments without screwing it up.  As Roger Lowenstein said, “Avoiding serious loss is a precondition for sustaining a high compound rate of growth”.  Words of investing wisdom, indeed!

The opinions expressed here are those of the author; not a financial professional.  Perspectives offered 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.

Top 10 Dividend Champions: Growing Dividends for Over 50 Years

Dividend Champions

If you’re working the Dividend Farming field, you’ll find DRIP Investing’s list of Champions, Contenders and Challengers packed with information to help you select investments.  Dividend Farming is a value-based approach to building a portfolio of stocks providing residual cash flow in the form of dividend payments.  In a nutshell, Dividend Farmers seek large companies with solid financial metrics and long histories of growing their dividends; possessing characteristics like those Ben Graham detailed in The Intelligent Investor.

In relation to those business traits, the table of Dividend Champions below, culled from the CCC List of 1.31.19, have grown their dividend payments for more than 50 consecutive years. 

  

To be a Dividend Champion, a firm must raise its dividend payment every year for 25 or more years.  All the firms in this table have more than doubled the minimum requirement to be considered a Champion.

Company	Sector	Industry	Years
American States Water	Utilities	Water Utilities	64
Dover Corp.	Industrials	Machinery	63
Northwest Natural Gas	Utilities	Gas Utilities	63
Emerson Electric	Industrials	Electrical Equipment	62
Genuine Parts Co.	Consumer Discretionary	Distributors	62
Procter & Gamble Co.	Consumer Staples	Household Products	62
Parker-Hannifin Corp.	Industrials	Machinery	62
3M Company	Industrials	Industrial Conglomerates	60
Vectren Corp.	Utilities	Multi-Utilities	59
Cincinnati Financial	Financials	Insurance	58

Why is the length of consecutive annual dividend payments, much less growth of those dividend payments, important?

 

Inertia is a start.  When a large firm engages in a practice, such as increasing its dividend for a long period of time, that activity becomes difficult to change.  Companies with long records of dividend payments are unlikely to change their payment practices due to habit.

Consequences to market value are a second reason long dividend growth histories are important.  Companies with lengthy records of increasing dividend payments know that changes to that pattern can have dire consequences to their stock prices, market image, and perceived credit worthiness.  Firms generally don’t flirt with consequences of that nature unless there are no alternatives and doing so becomes imperative.

Signaling financial strength to the market is a third reason to pay attention to dividend histories.  Firms increasing dividend payments annually over long periods communicate to the market they have the business strength to consistently generate cash to support those dividends.  Furthermore, the firms expect that strength to continue into the future.  Whether that “signal” is intentional or not, it persists and should not be discounted.

As a DIY Dividend Farmer, focus on risk minimization is critical.  If you’ll recall from the post on Risk vs Reward, risk is represented by a simple formula:  the probability of an event times the magnitude of the event.

 

Firms demonstrating a persistent record of increasing their dividends have a lower probability of running into financial issues, in my view, than firms without those records.  Although this probability may be difficult to quantify and may be considered subjective, I believe it’s supported by the characteristics of inertia, consequence, and signaling noted above inherently reducing the probability a firm will stop growing its dividend payment.

 

Reducing the probability of a negative event reduces the risk.  As Ben Graham, Warren Buffett, and his partner Charlie Munger regularly advise: build a margin of safety into your investing.  Dividend paying firms with stellar histories of increasing their dividend payments are a great way to do so.  Reviewing the 10 Dividend Champions with the longest time horizon of increasing dividend payments is a fine place to dive in if you’re considering Dividend Farming.

NOTE:  Of the ten firms listed in the table, Dividend Farmer owns shares in Proctor and Gamble.

The thoughts and opinions expressed here are those of the author, who is not a financial professional.  Opinions provided 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.