Thursday, January 31, 2013

Dividend Growth Investing In A Bull Market

DOW 14,000?

The thought of that in the throws of the recession just a few years ago would have been impossible to imagine. Yet here we are knocking on the door. The stock market has been on a tear over the last couple years. The Dow Jones Industrial Average has already more than doubled since it's March 2009 lows, and is up 9.57%over the last 6 months alone. 

Where does all of this leave dividend growth investors? Well, it's made our job a bit harder. I consider myself a strong proponent of dividend growth investing. I have somewhere around 90% of my net worth tied up in dividend growth stocks, as part of my Freedom Fund. That's real money in there that I sweat through many 50+ hour workweeks to earn. If that's not "proof in the pudding", I don't know what is.

How has this bull run made our job harder? Well, as a dividend growth investor I consider valuation of stocks paramount to my long-term success. The more expensive an individual stock is, the lower the yield -which means less dividend income, and the higher the likelihood that I will receive a lower total return on my investment. Although capital gains are not a primary concern to my investing goals, a lower yield, and less dividends, means I compound my growth at a slower rate. The less dividend income I receive, the less shares in the future I can buy since I'll have less capital to (re)invest with. 

So a higher market means that all stocks are more expensive, right? No. As always, there are undervalued stocks, fairly valued stocks and overvalued stocks in this market just as in any other. The DJIA may be up almost 10% over the last 6 months, but that doesn't mean every single stock in the Dow Jones, or S&P 500, is up almost 10% as well. Stocks are priced based on the underlying fundamentals of the company the stock is representing ownership in. This is an important fact that I think a lot of investors miss. Just because Coca-Cola (KO) is having great success in China doesn't mean all of the sudden Johnson & Johnson (JNJ) is going to sell more Tylenol in Chicago. Companies are all individual enterprises and have varying degrees of success based on countless factors, and the stocks of said companies invariably will show that success, or lack thereof. It comes down to earnings over the long-term.

However, this doesn't mean that investors aren't prone to irrationality and emotion. Quite the contrary, as I believe if humans were removed from stock market transactions the whole market would show little volatility as a whole and stocks would likely trade simply based on earnings with no variation of pricing ratios. But, alas humans are involved in stock market transactions and individual companies can be priced cheaply against earnings, sales, book value and other fundamentals...and they can also intermittently be priced expensively against said ratios. This variability is why dividend growth investors need to pay such strict attention to current valuation, also perform extensive qualitative analysis in addition to the quantitative numbers and compare current stock pricing to the historical valuation the market has placed on an individual stock. Investor sentiment (currently apparently bullish) will either provide a premium to an individual stock, or a discount to such. An intelligent investor will try to take advantage of the latter and be patient with the former.

In a bull market like we seem to find ourselves in currently, "good deals" on stocks can be harder to come by due to overriding investor sentiment and as such it would be wise to deploy capital at a cautious rate. I'm currently taking my time looking at individual opportunities currently and making sure to not get caught up in the hype, or "noise" as I like to call it. It's easy to get caught up in the hysteria when the market is climbing day after day, but I rather find myself more cautious than ever. As always, it's best to stay fearful when others are greedy. I find myself in the rather unique situation currently of having some difficulties at work, and due to this I've been building up my cash position for any unforeseen surprises (unemployment). It looks like there couldn't be a better time, in terms of market performance, to be in such a situation.

I'm going to include two articles that I think are on topic and extremely relevant to dividend growth investors in relation to the current market valuation and how that translates to individual opportunities. They are written by Chuck Carnevale, one of my favorite authors and the creator of the F.A.S.T. graphs. These pieces are written better than anything I could put together and I think they are worth reading in their entirety. 

Attractively Valued Blue-Chip Dividend Champions For Your Retirement Portfolios

Shiller PE Continues To Mislead Investors, S&P 500 Is Fairly Valued In Early 2013

Both are great articles. The first focuses on slightly undervalued as well as fairly valued dividend champions and the second article gives the author's take on why the S&P 500 is currently fairly valued as a whole. 

What about you? Is dividend growth investing easy or hard in a bull market run?

Full Disclosure: Long KO, JNJ

This article was written by Dividend Mantra. If you enjoyed this article, please subscribe to my feed [RSS]

1 comment:

  1. Dividend growth investing is a hard task in bull market. If you want successful dividend growth investing in bull market you should learn to recognize the major tend of the markets and to respect the powers of that tend. By following some rules carefully you can be a successful dividend growth investor.

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