Reframing Dividend Investing

This article was originally published on The DIV-Net, on May 28, 2009.

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 wisdoms 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.

2 Responses to “Reframing Dividend Investing”

  1. Manshu says:

    In the time to come, the wisdom of emerging markets being risky will be tested. People will realize that the markets may be more volatile but are certainly not riskier than other markets.
    The risk is that you create a label like BRIC and then treat Russia and China in the same way. That makes no sense.

    • Dividend Tree says:

      I agree with your view of BRIC label does not make sense. Each country is different and they work in different way. This is again one off wall street investment firms creation (think GS!). On a personal note, I am most bullish on Brazil/India markets. Demographics and internal consumption is in their favor. However, I find Russia/China to be having similar ambitions with different execution method. China wants go economic supremacy way, while Russia wants to go military way using its natural resources. On the other hand India/Brazil are following more or less similar approach of demographics/internal consumption way (and both do not aspire for world dominance, perhaps only recognition).

      I do not know about Brazil, India is surely a volatile market, but if one has 10+ year of horizon, India is the way to go. In case of India, the big risk for US investors is (1) lack of correct information – too much shoddy stuff going on. Looks like companies in India do not believe in disclosure. If it is there it is convoluted. (2) majority of companies are personality driven, rules can be easily bent to suite company needs; (3) lack of ability to invest in India’s market. There are no good investment vehicles. I personally, do not consider MFs as good vehicles. ADRs are only few. So what does a US investor do? May be US based ETFs? Refer this post

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