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Dividend Growth Investing is about psychology as much as actual numbers and percentage returns. The strategy is meant to steer a middle course between two extremes, what I often refer to as balance. The first extreme is price volatility, and overcoming that through the psychological impact of receiving dividends without having you bailing out on positions at the worst moment. The other extreme being going to cash, taking your money out of the market altogether.
Dividends take into consideration that people invest in assets to create income. When we forget about price charts and where price sits within a specific time frame on a chart, we focus on an income flow, insuring that it grows to meet our needs at a time when they need to be met.
Too many of you people are sucked in by the many others who are always asking, how much is your position up? How does it compare to the market? Are you able to beat some benchmark? Some of you still don’t get it. The dividend growth strategy is an income based strategy and the question you should be answering is, how much did my income grow this year? Does my income flow beat that of some benchmark?
A lot of you are so wrapped up over short term company performance that you don’t realize how much you are undermining your strategy. You are setting yourself up for failure in a significant bear market because you can’t take your focus off the share price.
You see me pay attention to earnings only because I’m looking for an opportunity to build our positions and I have two very definable strategies into how I do that. One is buying off a beat and raise during earnings season, and the other is when I can buy quality companies at a discount to fair value.
Some of you are willing to buy at a discount to fair value, but you give up on your company when it doesn’t keep pace with the market, its peers, or some other such thing. All I focus on is the income. Is it growing or not? There is no ambiguity, you know, it’s a simple yes or no answer.
If a company I own is under-performing as a company or to the market, like an IBM for example, I may not add more shares now but I’m not jumping ship either. It pays a very nice dividend and they continue to grow it. The company may be under-performing on top line growth, but I continue to get a pay raise for my troubles.
I’m not looking to sell companies I bought to provide income even if they rise 50%, 100%, 150% or more. It’s the income those assets generate that I’m interested in and if the company is down 20% or more, I’m still not selling, my income hasn’t dropped, only the share price did. When you finally understand the psychological impact of that on managing a portfolio, you’d be surprised how easy this dividend growth investing can be.
Others can chase the market all they want, some people just need chaos in their lives, some people have a need to make things harder than they are so they can feel smarter, but the average high school student could succeed at this as long as they are shown the principles of dividend growth investing and stick with them.
I read somewhere today that Buffett’s fortune saw 80% of his returns over the years coming from 20% of his holdings, it’s just that those 20% are held in size. You can’t hold something of size if you keep trimming or selling every time a company faces adversity. You are supposed to buy the companies you are comfortable enough holding through good times and bad, and in those bad times, continue to build the position. The sooner one understands that, and applies that, the sooner they should start to see some serious results.
Build small, end small. Build big, end big. Your choice!
Un optimista es un pesimista mal informado