Thursday, June 4, 2009

Reframing Dividend Investing

Like many of us, I like reading wisdoms of well know individuals who have been there, done this, done that, and have shown success in their fields. In addition, to the literal meaning of those wisdom or observation, I like understand the essence of it and put into my own perspective. A while back, I came across P&G CEO A. G. Lafley's observations in his book "The Game Changer: How You Can Drive Revenue and Profit Growth with Innovation". He talks about two schools of thoughts viz., business school thinking and design school approach.

The first school of thought, i.e. business schools, tends to focus on inductive and deductive thinking. Inductive thinking is based on directly observable facts, while deductive thinking is based on logic analysis and past evidences. Here, the generic essence is to avoid newer ideas because there is no suggestive evidence. It removes newer ideas from our repertoire.

Being an engineering management professional, my investment process and dividend growth approach actually follows this inductive and deductive thinking. He couldn't have been any more true on this one. I continue to use past data and results to make investing
decision with a hope that corporations will continue to pay growing dividends (as they have done in past).

One thing that I intuitively acknowledge but fail to execute is that the economic growth seen by US in past will not come back in the same form (or at same growth rate). First UK lost is growth, Japan realized it too late, and perhaps this time US is showing maturity and slowing down of growth rates. I am not professing dooms day scenario for US economy. On relative terms with global peers, it's just way ahead in any form. But it is likely that growth rates will not be as spectacular as we have seen in past 50 years.

The second school of thought, i.e. design schools, emphasize on abductive thinking. Here the approach is to imagine what could be possible. It helps to re-frame the question and challenge the existing constraints. It helps to add newer ideas and approaches.

Keeping with this abductive thinking, I came up with the list of potential dividend growers and international equity for dividend growth. Any corporation on this list will not pass the screen test of any conventional dividend growth process. If we believe that growth will come from these new corporations or emerging markets, then we need to sow seeds in those corporations. In one of the weekly link fest, The Dividend Guy referenced a link which shows that Indian companies are also growing dividends. However, emerging markets are risky preposition, lacking dividend focused investment vehicles, and many more.

The best way to address this conundrum is to bring in balance by using asset allocation. One should continue to invest in newer dividend companies and/or emerging markets to an extent of what individual's risk profile allows. In my dividend portfolio, I use 5% allocation to emerging markets. I have kept my self open to either reduce or increase this allocation. Time will tell which way to go.

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