We individuals fall into the trap of focusing two much on one or two successes. And we fail to look from an overall portfolio perspective. We create a portfolio that is hodge podge of many different methods. There is no discipline. The ideas that we keep discussing in pubic, we never execute on them. It is for others to execute. e.g. Look at the financial websites, all the analysts and managers writing lengthy articles discussing pros and risks of a particular company. They will explain their reasoning for investing in it. When you look at the disclaimer, it’s the clients who would own it. On majority of the occasions, they do not own for personal accounts.

We as individuals also follow similar path. We keep discussing the ideas but, rarely act on it. We do not have conviction to execute our own well crafted ideas. We do not have persistence to follow our own ideas. We keep bouncing from one method to another.

For us individuals, it is the lack of discipline that kills us. In my case, when I think of dividend investing, I do not think of high yields. I try to understand what it really means to me and how it will help me in my wealth creation. To me, dividend investing or dividend growth investing is all about total returns (which includes dividend income and capital appreciation).

Keeping with that, I try to understand the quality of dividends and how company generates this cash for such dividends. In general, good quality of dividends come from companies that (1) consistently generates cash by selling its products or services; (2) remains focused on its core competency; and (3) effective use of capital for growth. Such companies have low downside risk. Even if they get pulled down by other macroeconomic trends, it tends to be a short term event. In general, such companies bounce back.

Many companies cut or suspended dividends in 2008 and 2009. It does not necessarily mean dividends are dead. As in other aspects of life, success is never 100%. We have to accept the fact that some of the companies (or stocks) that we buy will have failure. We have to keep this failure to minimum by being disciplined and remaining focused. Folks who showed these traits probably have more greens in their portfolio.

This article originally appeared on The DIV-Net on April 8, 2010

Merry Christmas and Happy Holidays to readers of my blog. I hope you enjoy and have a good time with your family and friends.

Like you all, I will also be looking forward for a joyful and fun filled new year.

It is close of five year now that I have been a long term buy and hold, and dividend growth focused investor. When I meet friends, acquaintances, or colleagues, on many occasions the discussion starts from what’s market doing today and steers towards trading/investing is nothing but a poker game. I get a sense that many of these folks think that buying (and selling) stocks is just a gamble of some kind. Irrespective of this, I believe both, trading and investing, have their own set of pros and cons depending upon what context an individual is looking at it. In the end, both trading and investing is done to make money. Some use approach of capital appreciation, some use dividend income, some do trades to generate income. The key is to have a plan and execute it with consistent results.

When it comes to dividend investing, many individuals think of high yields (perhaps Cramerica syndrome!). It shows lack of patience and tendency to read too much into the business media. They do not understand dividend growth and sustainability.

There are two very significant aspects that investors need to understand about dividend growth investing and sustainability. These are (a) quality of dividends; and (b) potential for capital appreciation.

• Quality of dividends is related to how and from where the company is paying dividends. Good quality of dividends from companies that consistently generates cash from selling products or services, manages dividend with payout ratio, prudent uses capital for growth, and remains focused on its core competency. It is ideal to have everything in a company, but ideal situations and scenarios are either in short supply or not practical. Occasionally, companies will have issues and stumble, but those should be short lived. As long as quality of dividends are good, I believe the dividends are sustainable. These dividends add to the total return.
• Potential of capital appreciation is related to individual’s cost basis and future growth in value. Buying a stock at fair value builds-in a level of safety margin. Furthermore, I believe as the company grows and expands, it will grow its earnings and hence the dividends will grow. This growth in the company is bound to result in value over a period of time (and hence capital appreciation).

Thus, the key is to invest in companies which can grow its operating cash flow with consistency and can sustain it. A company that consistently generates cash is likely have to less downside risk. Even if they do get affected by market downturns, such companies experience less downward pressure. In addition, the continued dividends keep adding to the total returns. Examples of such companies are Proctor and Gamble (PG), Johnson and Johnson (JNJ), Becton, Dickinson and Company (BDX), T. Rowe Price Group (TROW), Sysco Corporation (SYS), Emerson Electric Company (EMR), Dover Corporation (DOV), and Jonn Wiley Sons (JW.A).

Dividend investing does not mean focus on high yield only. It is about consistency and sustainability which inherently focuses on total returns.

Economy, Finance, Investing.…..

• Dividend vs. Growth ETFs? Why dividends have outperformed
  
• Are high dividends sustainable?
• Is now time to sell your dividends stocks
• Apparent risk vs. actual risk
  
• How to invest in emerging market
• Double Dip Recession: Why Dow 10000 may not last?
• Dividend payout vs. free cash flow payout
• The lost decade of stock investing
• Festival of Stocks
  

These are some diverse set of articles from fellow bloggers and business magazines. I hope you enjoy reading all or some of these interesting posts.