In last 10 or 15 years, the meaning of investing has drifted from being part owner of the business to mere buying a ticker stock. Even the concept of value investing, which at core means buying a good business at cheap, has drifted towards using volatility to value or price the stock. The relative basis has shifted from using quality of business to what is the price it is being traded. The fundamental concept of owning a good business has taken a back seat. The ease with which one can buy and sell stocks at a click of few mouse buttons, has distracted us from understanding the business. We have started to believe that buying and selling stocks online is investing. In my viewpoint, this is what makes us clueless about the stock market. Business comes first and stock market comes later. That’s what is focus of the book I recently finished reading, Why Are We So Clueless about the Stock Market? continue reading rest of the article….
The purpose of my starting this blog spot is to share my journey in achieving my investment goals. In the process, I expect to continue my learning process by discussing contrasting views, and hopefully make smaller mistakes. Continuing with my motto of keeping things simple, this page describes my seven step investment process in a broader context. I foresee that over a period of time, this page will act as index page for my complete investment process. continue reading rest of the article….
The third the
- Risk manage
ment is a must. In my dividend portfolio, the risk to dividend (or passive cash flow) is so mething that I must take into account. I must provide myself a mechanism to measure this risk (infrastructure!) in my dividend portfolio.
- I need to position myself and invest in e
merging markets. All of the existing S&P500 dividend aristocrats started raising dividends in 1970s and rode at the back of US economic growth. Similarly, if I can sow dividend seeds in e merging markets now, I can possibly ride the growth story. The challenge is to find the right invest ment vehicles from a small individual investor perspective.
- The asset allocation model in this book is not oriented towards individual investors. But if I understand the funda
mental basis on which it is build, I believe it will provide megood guideline to fra memy individual portfolio.
I believe the book was worth a read for these three
In today’s post, I will discuss how El-Erian’s emerging market theme affects the dividend investors (DIs). Some of the characteristics that we DIs look for in a company are as follows:
- Management’s sincere conviction that shareholders have stake in the business and earnings must be shared with them;
- Dividends are paid from operating earnings;
- Consistent growth in dividends can be maintained only if there is consistent growth in earnings; and
- Dividend focused investing is a long term (i.e. 25-30 years) preposition.
Looking at the dividend aristocrats, one can see that they have had a pretty decent ride for the last 30-40 years on the back of growth in US economy. Along with the US economy, these companies were consistently growing their revenues (and hence the earnings). Managements consistently shared this bounty with the share holders. Now today, in general, dividend aristocrats as a group are struggling to find new source of growth in revenue and earnings. Most of the dividend aristocrats (not all of the companies) are focusing to increase earnings from internal efficiencies or cost reduction initiatives, because they are hard pressed for growth in revenue. How long this can continue? Dividend investing is long term process. Therefore, I foresee that the pool of companies in dividend aristocrat will continue to decrease.
For DIs, this is where the El-Erian’s emerging markets theme comes into play. According to the author, emerging markets will be growing faster and provide higher contribution to earnings in next 30-40 years. In that case, doesn’t it make sense to invest in dividend-based companies in emerging markets? For a moment let us think that international and emerging markets as foreign markets.
One of the issues for DIs is that there is very little public information on companies in foreign markets. If companies do not have ADRs then it is difficult, if not impossible, to find the details of such companies. Additionally, the regulatory framework and governance may not be as advanced as developed world. Here I am comparing the basic minimum requirements and not a full-proof system.
Other way to look at this is US companies or multinationals who get most of their earnings from foreign markets. Such companies have operating history, dividend payment history, management’s performance, presence in US markets, etc. Recently, there was an article on The Div-Net by Dividend Growth Investor which discussed about top 10 companies in S&P500 index and their source of earnings. This article brings out the fact that top 10 companies by weightage in S&P500 index (with approximately 22% contribution to index) derive 44% of total financial contribution from foreign markets. It is likely that if we dig deeper, we will find more such companies and this 44% contribution may even surpass 50% cumulatively for all S&P500 index companies. While we do not have the same investment vehicles as used in El-Erian’s example, the Harvard Endowment Fund, we DIs surely have US-based companies and/or multinational companies. Investing in such companies provide a very good vehicle for investing in international and/or emerging markets.
For us DIs, this is a good fit to El-Erian’s theme of long-term earnings growth in emerging markets. Also it helps us build dividend portfolio using the existing US financial infrastructure.
In the last post, I presented El-Erian’s major the
The discussion of the asset allocation in this book should be viewed as reflection of author’s understanding of the world of finance. It is the result of author’s belief and conviction on how financial markets are evolving. I do not interpret this as a guideline, fra
Among others, one of the key characteristics of dividend-based investing is:
ment’s sincere conviction that shareholders have stake in the business and earnings must be shared with them;
Now let us compare this characteristics with one of El-Erian’s world colliding the
It is highly likely that dividend investors (DI) may not invest in funds, companies, and/or institutions that only do business in derivatives domain. Only because they do not have any background history associated with it. DI’s are looking for companies with dividend history and sincere manage
The author does not com
In that case, I interpret this as it is acceptable for companies to use derivatives to an extent where risk of loss is understood and manageable. In other words, use it but do not over expose; one of the basic tenets of portfolio manage
Since the post is becoming long, I will discuss the the