I’ve admitted it in the past; I’m not the typical dividend investor. I started investing by trading, buying & selling every two weeks while most dividend investors usually buy and hold completing the sale transaction after several years holding their shares. In my opinion, the dividend investor is the upgraded version of the buy & hold investors. More often than not, the buy & hold and dividend investor is the same guy. I strongly believe in dividend investing, that is why 100% of my portfolio is composed of dividend paying stocks. I even wrote two books and created a whole investing platform around dividend stocks called Dividend Stocks Rock. Still, I’m not convinced a 100% buy & hold strategy is the best way to maximize your investment these days.
The Investment Thesis Behind the Buy & Hold Strategy
Before I present my view of investing, I think it’s important to mention why the buy & hold philosophy is so seductive for many investors. First, several famous investors have used this method in the past. Guys like Warren Buffett have reputations for success to make following their path seem logical. Invest in solid companies that you can understand and buy only if you intend to hold the stock for ten years… or more. This is roughly what you can learn from the buy & hold strategy.
Then, there will be a horde of investors with shocking examples of company success over the years such as Coca-Cola (KO) which shows a total return of over 5,000% since 1978. But my point is not to debate as to whether or not you should buy & hold stocks for several years. This totally makes sense for your core portfolio, but if you want to maximize your return, I think you should add more trading habits to your investing strategy.
The Way I See Things: a Buy & Hold Core + a Growth Segment
I’ve had several reactions about my latest trade: selling a dividend aristocrats (McDonald’s NYSE:MCD) to buy a speculative company working in the oil industry which is down 35% since January 2014 (Black Diamond Group TSE:BDI). For many, this transaction looks like a trader’s move at best and like a gambler for others.
I told you already: I’m not the typical dividend investor. I have a set of 7 investing principles I follow religiously and I also allow some cash to make “growth additions” to my dividend portfolio. The point is simple: I have most of my portfolio in shares of companies I truly want to hold forever (such as JNJ, KO, Telus(T), ScotiaBank (BNS), DIS, WMT, etc) but I also allow myself to forget about 1 of my investing principles if I think there is a great opportunity on the market. I have done it in the past with STX, INTC and HSE which all reported profits over 25% over a short period of time. I’m currently holding AAPL, HP, Gluskin & Sheff (GS) and Balck Diamond Group (BDI) in my “additional growth” segment. When I sold MCD to buy BDI, I simply sold a part of my core portfolio to transfer it to my “growth” segment. My point is the following, what if MCD is the new KO that did an astronomic 1.82% (plus dividend) over the past 16 years???
You see it right, someone who bought and held Coca-Cola (KO) since June 30th 1998 until today only made 1.82% in appreciation. Thank god there is a dividend attached to this stock!
BDI’s drop in price is directly linked to the oil sand industry. BDI rents & sells modular equipment for remote areas. Its biggest market is renting modular homes in Northern Alberta for oil sand exploration businesses. However, nothing is stopping BDI from exploring other markets (basically any company with an interest to develop in a remote area) and generate additional revenue. The company shows solid fundamentals and pays over 5% in dividend yield right now. Between a stagnating company like MCD which is probably going to trade around $95-$100 in three years and BDI which can easily trade at $30 (from $19 right now) in 12 months, I’ll take the chance. Keep in mind that I’m not buying a weak company with shaky financials, if you look at BDI’s fundamentals, you will see that the company shows strong basics. Now it’s only a matter of going through the oil barrel storm before we see the light. The 5% dividend is more than enough to keep me waiting in the meantime.
To be honest, in this specific situation, the perfect scenario would have been to keep MCD and use new money to buy BDI. But since I didn’t have more liquidity at the moment and have been following BDI for the past 18 months, I thought it was the right time to make this move.
I’ve been using this strategy for a few years now and it has served me very well. Let’s see if its only luck or a solid investing strategy. I personally think it’s the latter!
Nobody knows what BDI will do in the next 12 months. By my standards, it is not a solid dividend paying stock.But, if you are right it could become one of your best move.That is the problem, it is almost a speculation in it self.I’ve tried to hit it big with some mid caps before, and most times it hasn’t worked. I prefer the buy and hold strategy, sell only when the company fundamentals deteriorates. I’ve had MCD for 10 years, the dividend is growing, and I suspect I’ll still have it in 10, and I’ll collect my 3.35%.
My strategy is to buy and hold a limited number of stock (currently 16 stocks for $90k invested)and buy these stocks again when their value drop for a reason or another. I bought shares of GE in 2008 for $30, BUT, I kept buying over the years, in 2009 and 2011. So, my average price is $17. If your theoretical investor had done the same with Coke between 1998 and 2014, he would have done much better. With a limited number of stocks to follow, you get to “know” them and know when to buy them.
I typically hold my portfolio, unless I need the money for a major purchase. Once I sold my portfolio to buy a car. And once I sold all my holdings that were in the green to buy a house, and kept the stock that was in the red. Since then I have not sold anything (other than forced sells when there is a take-over bid.)
Hello Michel,
I would like to see what are your dividend investing criterion.
EPS is up 64% over 5 years
Revenue is up 369%
Dividend is up 77%
PE under 17
PEG at 7.4
Dividend yield at 4.50%
The only thing is the payout ratio at 85%. I do think it’s a strong dividend payer. I’d like to know why you think it’s the opposite.
Welcome to the blog Francois,
I agree with you it’s easier to hold stocks for a long period and buy it when they drop. I hope to experience that in the future (I actually bought AAPL at a higher price the second time, hahaha!)
I am a “died in the wool” indexer who initially decides on a certain assett allocation 60/40 equity/bonds, and although am tempted from time to time to buy the odd attractive looking stock, invariably decide against it. I reinvest all dividends/distributions in the ETF’s that I currently hold, and only trade at rebalancing time. Therefore, Buy and hold is my philosify, come hell or high water.
I believe that some stocks like the telecoms which are unlikely to have earnings dips are the buy and hold type. Other steadies like Rogers Sugar are good for the long term. Others like mid cap oils, I think if you can get a decent dividend and a cap gain equal to a year or more of dividends should be sold and possibly if they become a buy again get back in.
With some volatile stocks take your gain while you can get it.
Stay out of dead industries (newspapers) altogether.
We are in a healthy market (IMHO) – not too bearish and not too bullish. Sure, this is when it is a bit easier to increase your assets by picking winners but you never really know when the tide is going to turn and those juicy little gains dissapear with some of your capital. When the wind blows even the turkeys can fly. The next day your speculation stocks will bite you. I may have a boring strategy following Mike’s rules but being in my second year of retirement and having a good variety of solid, proven, growing dividend stocks that I only need to analyze twice per year is kinda nice.
Hi Mike,
Good article & agree with you on your strategy of holding a core portfolio of dividend growth stocks augmented by some growth stocks. I follow a similar strategy but generally stick with large cap stocks.
I purchase stock based on four criteria. However I’m ready to sold them rapidly is they are going outside the purchase envelop.
in the past I sold JNJ, PG, CM because I have made enough profit, same thing with PJC, TRI, T.
Buying and keeping is somewhat dangerous and it is important to keep thinking: casing some profit and rebuying good stock when the price is going down.
Hello Maurice,
It is definitely hard to follow your investing strategy, but I’m convinced you show a good return. Successful investors are also among those who follow their rules…all the time!
Hello David,
good point about industries; it is important to check the overall market first before diving into a good opportunity. I’ve noticed tha tmost of the time, the industry by itself will drive stocks higher or lower.
Hey Wayne,
Thx for the good words, I hope you continue to make the money on the market!
Hello Hemgi,
do you mind sharing your four criteria?
One important thing to keep in mind is that KO was massively overvalued in 1998, at the time of the entry-point you picked KO was trading at a p/e of over 60. MCD is currently trading at a p/e of 19.
Mike. Boring – yes, outdated – no. A stock with a solid balance sheet, strong FFO/AFFO, good dividend yield, and rising dividend can be held for years. I have held Fortis (FTS-T) for over 15 years. They have raised their dividend for over 40 consecutive years and the company is virtually recession proof. My annual dividends (DRIPped) now exceed the total cost of my original investment. Watching the quarterly dividend DRIP is boring but very effective. The extra kicker is that the shares traded just below $10 when I purchased them and the price is now approaching $40. Between share price and dividend reinvestment, my holding has multiplied over 8 times in 15 years.
Hello Thomas,
you bring in a good point. A similar situation happened with WMT; the company was always good, but was clearly overvalued at one point in its history.
Hello Dan,
the power of dividend growth is definitely the core reason why buy & hold still brings returns. This is also why I have a core portfolio following this philosophy 🙂
Cheers,
mike.
BDI’s market cap is less than $1B, revenue less than $500M. I don’t think it’s a “strong” dividend payer? These type of companies are one slight market shake-up away from getting washed away. A “strong” dividend payer ideally operates several billion dollar brands. One of my criteria: $10+ billion market cap.
As for Buy+Hold: I usually sell stocks when they’re clearly overvalued (PE of 25+). It’s not like you can’t find accurately valued dividend stocks with more room to grow.
Hi there,
I am with you in this one. I bought 110 just today because I think they got a lot of growing potential (and a nice dividend in the meanwhile)
Un saludo
Al