How many times we have had folks discussing investing or trading ideas about which stock looks good, which stock has value, and etc, etc. I am sure many of us have engaged in such discussions. Personally, I have tried to avoid such discussions on specific stocks. Almost always, I end up asking folks about their investing paradigm or what is their focus. Surprisingly, almost every time, the answer is on similar lines. That is, does it really matter what paradigm we use? Isn’t the focus just to make more money?
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