Introduction to DividendStocks4Income
I’ve been involved in the market for over 25 years – mostly in options and trading. Now, looking ahead to retirement sometime in the next 10-20 years, I’ve become increasingly focused on income investing, and in building an investment portfolio capable of providing all or most of a post-retirement income.
If I were just starting out and had 20-30+ years to retirement, I’d be focusing heavily on dividend-growth stocks – that is, stocks with typically low to modest current yields (<1-3%) but whose dividends are growing at a strong, consistent pace. The eventual returns over time on such investments can be quite spectacular, especially when viewed from the perspective of yield on initial cost (as explained in the short article The Power of Dividend Growth at The Motley Fool).
On the other hand, if my time horizon was less than 5-10 years, I’d be focusing on high-dividend-paying stocks and investments, which typically offer a high current yield (>4-5%) but a slow or non-existent dividend growth rate. Utilities and telecom companies come to mind here, although many Master Limited Partnerships (MLPs) and REITs may fall into this category as well.
As my time horizon is somewhere in between, I’m considering both dividend-growth and high-dividend paying stocks equally. And what’s exciting about the recent market carnage is that many previously expensive and low-yielding dividend-growth stocks have fallen to levels where they now almost qualify as high-dividend stocks as well – potentially the best of both worlds!
So, how do I go about deciding which stocks to invest in, and when? Everybody has their own approach – for example, Josh Peters, editor of the Morningstar Dividend Investor newsletter and author of The Ultimate Dividend Playbook
- Dividend Criteria – These include a company’s dividend history (its dividend consistency and/or growth), payout ratio (can the company afford to keep paying its dividend?) and payout schedule (the timing and frequency of its dividend payments).
- Fundamental Analysis – This attempts to answer the question “Is the stock a good value?” Here I consider the usual things like a company’s earnings, sales and book value, and their relationship to the stock price, and how that compares historically. I also like to look at a stock’s present “fair value” estimate based on a discounted cash flow valuation approach. All of this analysis is incredibly helpful, but can be enhanced with the use of …
- Technical Analysis – Here I like to look at a stock’s price action – specifically where the current price is relative to its long-term trend channel – and a price oscillator or two. These help me identify market extremes (not necessarily tops and bottoms) and help ensure that I’m buying low. That’s about it. No fancy Elliott Wave analysis here.
A word on risk management
Apart from the stock selection criteria above, I also follow some general money management rules to help minimize risk to the portfolio as a whole. They’ve served well so far in the recent market plunge:
- Position Size – I typically don’t allocate any more than about 2-3% of my total portfolio value to any one position. This way, damage to the portfolio remains limited even if a number of positions totally “blow up” and go to zero.
- Diversification – I want exposure to as many sectors as possible and have no bias for or against any particular industry (including financials in general) as long as I feel I’m able to buy something at a reasonable value.
- Buying Over Time – Just as it doesn’t make sense to go “all in” on one stock or sector, it’s probably not a good idea to jump 100% into the market all at once – even if it is down almost 50% from its highs. It can – and may very well – go lower. By some measures based on previous bear market valuations, a value of 600 on the S&P 500 could be in the cards. But who knows? By keeping some cash on hand, and patiently allocating it out over time, I’m able to continue to take advantage of opportunities as they present themselves.
In addition to all the above, I’ll often sell covered calls and cash-secured puts in my account(s) to generate additional income and/or to exit or enter positions. (The latter (cash-secured puts) is an excellent way to get paid to wait while potentially purchasing a stock at a below-market price.)
That’s about it in a nutshell. I’ll go into further details and examples of all of the above in the days and weeks ahead.
