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Why I Only Buy Dividend Stocks

January 1st, 2014 at 03:03 pm

For 20 years or more, I invested pretty much the same way most other people do. I put my retirement savings into a basket of mutual funds and hoped the value of that basket would grow. But every price downturn would shake my confidence in that hope of growth. I would look at the drop in market value of a fund -- or of my entire portfolio -- and fret, worry, stress. And if the price drop was deep enough or continuous enough I would finally freak out and sell the position at a loss.

Why? Because my perception of the value of my mutual fund shares was solely based on their market price. Because I saw my retirement future as tied to and dependent on the market price of those shares. Because I did not want to lose any more of that retirement future to stock market drops.

Boy, that really did not work for me. My fear of loss was too powerful a force. Fighting it involved daily stress, doubt and anxiety. And each time I gave into it by selling "to stop the loss" I would be hit with feelings of failure. And if the share prices recovered some time after I had sold, I would add to that feeling additional feelings of guilt, recrimination... and more failure. I felt completely out of control of my retirement future.

Thank heavens I've found a different way of investing that has really worked for me. A way that has put me much more in control. That way is to only invest in carefully screened individual high-yielding dividend stocks.

Now, when I buy a block of a dividend-paying stock, in my mind what I am focused on is the dividend. I am buying the future income stream that will be provided by that dividend. I am not projecting or counting on an increase in the stock's market price (although I certainly will cash in on it if it happens).

I have built my stock (and bond) portfolio to provide me income based on my stock dividends and bond interest. I have NOT built my portfolio on the expectation of following the standard withdrawal strategy of cashing out positions and spending down the portfolio's principal. Some day in the future I may very well adopt a cashing-out plan. But that will be done either as an end-game or in response to IRS required distribution requirements. I will not be cashing out positions just to cover my living expenses.

So, to summarize: in my mind, the value of a stock is in its dividend, not its market price. So now I don't freak out when the market price of any of my stocks drops. As long as I can determine that the dividend will continue to be paid, I do not concern myself. The dividend is my mental defense line against stress and anxiety. Against pulling the sell trigger based on nothing but herd-driven market panic.

This investing mindset works for me. But I am not a financial advisor and I am not saying this will work for you. So, what does work for you? What lets you sleep at night?

26 Responses to “Why I Only Buy Dividend Stocks”

  1. baselle Says:

    I have both a 403B and invest in a portfolio comprised entirely of Drps - dividend reinvestment programs. When the time comes, I will go into my transfer agent accounts and flip them from reinvesting dividends to mail me dividends. I have both the tax deferred 403B w/ mutual funds and taxable DRPs on the side and I'm calm about having both accounts. In a sense what I've learned about drp investing helps me assess risk, keeps me calm during bear markets, etc.

    How are you handling the fact that you will be generally getting a quarterly income stream?

    Dividends are great but not perfect. Your risk is now that a company can stop paying a dividend rather than the stock price.

  2. Sian Says:

    @baselle

    if it stops paying the dividend, then the stock can be sold and another purchased for the selling price and therefore not out of anything out-of-pocket?

  3. baselle Says:

    @sian

    Most dividend investors view their dividends as a sign of health. Usually when a stock cuts their dividend their stock price drops. You can definitely lose money, even if you sell at a similar price. Smile In addition, a company that pays a dividend can be bought by a company that does not, so the dividend is shut down ... that has happened to me a couple of times.

    All I'm saying is that dividend stocks are great and that investing in them is my approach also, but after 10 years of investing in dividend stocks, I can tell you its bullet-resistant, not bullet-proof. You still have to watch and learn.

    I love Seeking Alpha for information and analysis FYI.

  4. Retired To Win Says:

    Hi, Baselle...

    I'm handling the quarterly income stream by (1)factoring in that dividend payment months are staggered among my portfolio's stocks, and (2) by maintaining a "cash backlog" in the account(s) approximately equal to one quarter's dividends so I can draw from that cash and let it replenish as dividends are subsequently paid.

    BTW, 2 or 3 of my stocks actually pay monthly dividends.

    Thanks for commenting!

  5. Retired To Win Says:

    Hi Sian...

    I wish it worked the way you assume. But no. If a dividend-paying company stops paying its dividend -- or lowers it -- the price of its stock will take a big dumper. This is why one needs to do a goodly amount of research into a company's financial health and prospects before buying its stock.

  6. buckybadger Says:

    I'm glad that you found a way to help you sleep, but I'm curious as to how many different stocks you have?

    I feel safe due to my diversity. By investing in index funds - total US stock, total international stock, total US bonds - I don't have to worry if a company fails. And lots of big, strong, good-looking, dividend-providing companies fail spectacularly.

    I don't consider myself smarter than people for whom market research is a full-time profession, and if THOSE people can't beat the market, then I sure don't think that I can. Certainly not with the limited amount of time that I'm willing to spend doing finance stuff.

    So like I said - I'm glad that you can sleep at night, but I would caution people from making the same choice.

    For most people, the best way to invest is to keep an asset allocation (stocks vs bonds) that allows you to sleep at night even when the market is in a downturn. So I think that you weren't doing it wrong - you just needed a different asset allocation to make you comfortable.

  7. Sian Says:

    thanks for the info ya'll! Smile

  8. Retired To Win Says:

    Hey, buckybadger...

    Like I did say, I'm not saying my way is for everyone.

    It's not that I'm trying to beat the market. I'm not. I AM trying to hit my own personal investment performance goal, which I have managed to do (for whatever reasons) AND I am -- for the reasons I've already stated in my post -- sticking with my dividend-stocks-only approach.

    My portfolio, to answer your question, started off composed of 20 equally-weighted stocks. Over time that has shifted here and there, so that now basically I could have no less than 20 (but as many as 30) individual stocks with none of them amounting to more than 5% of the portfolio's book value and no one industry amounting to more than 10% of the portfolio's book value.

    For more details, please refer to my post entitled "My High Yield, High Risk Investing Strategy."

    Thanks for commenting!

  9. PatientSaver Says:

    Retirement funds should be considered a long-term investment, and you really shouldn't be even considering selling if your time horizon is 10 years or more. I do understand the nervousness you feel after a big downturn in the market, but to me that tells me that your investment mix is out of kilter with your tolerance for risk.

    For myself, I invest in low-cost index funds, largely with Vanguard. The "low-cost" part of that sentence is very important, and I don't believe actively managed funds deliver much added value.

    I did recently make some changes to my overall allocation as all my bond money was in a bond index and some in TIPS. Worried about the interest rate increase that everyone says will eventually come, I did open up two short-term investment grade bond funds. Hopefully that would mitigate losses when interest rates rise.

  10. Nika Says:

    I'm curious - what are your top 5 holdings?

  11. Retired To Win Says:

    Patient Saver -- the whole point of this post is that focusing exclusively on dividend-paying stocks has eliminated the nervousness I used to feel. Technically, I guess I have changed my asset allocation but not how you mean.

    Thanks for posting!

  12. Retired To Win Says:

    Nika -- my holdings are evenly weighted. I really don't have "top holdings." Check my post titled "My High Yield, High Risk Investing Strategy" for complete details.

    Or you can check my reply to buckybadger, above :O

    Thanks for posting!

  13. Nika Says:

    Could you list those 20 stocks?

  14. Retired To Win Says:

    Nika...

    You've asked for a list of the 20 stocks in my portfolio, but the list changes as I turn over positions for a profit or dump positions that get hinky on me. And I'm not looking for even the remotest possibility that someone would follow me into the positions I'm holding. So... no, no specific list. Again, anyone can put together their own list following the same criteria I have... which are detailed in my recent blog post entitled "My High Yield, High Risk Investing Strategy."

    Good luck!

  15. Nika Says:

    Lol, I didn't realize you are afraid that everyone would just copy you. Warren Buffet's picks are publicly available information, and most people won't follow even him.
    I was only curious and I never think twice about sharing such info myself.

  16. Retired To Win Says:

    Nika Says:

    January 5th, 2014 at 07:39 pm

    Lol, I didn't realize you are afraid that everyone would just copy you. Warren Buffet's picks are publicly available information, and most people won't follow even him.

    I was only curious and I never think twice about sharing such info myself.

    -------------------------------------------------------------------------------

    Nika,

    I'm just being cautious (maybe too much so) about covering myself legally as far as giving financial advice goes. I'm not a financial advisor, and I don't want anyone to think I am providing financial advice. For me, putting out a list of stocks would be crossing the line.

  17. disneysteve Says:

    I'm glad your system works for you but do you realize that what you're doing isn't really any different than what a mutual fund does? The main difference is that a mutual fund holds a lot more stocks than you hold so it is more broadly diversified. A fund like VDAIX Vanguard Dividend Appreciation Index Fund holds 146 stocks that have a history of steadily increasing their dividends over time. The ER is 0.20%. How much are you spending on transaction costs getting in and out of positions throughout the year? Plus by going with an index fund, you eliminate the stock picking and market timing aspect of what you are currently doing. It might be worth looking into.

  18. Retired To Win Says:

    disneysteve Says:

    January 7th, 2014 at 08:10 am

    [I'm glad your system works for you but do you realize that what you're doing isn't really any different than what a mutual fund does? The main difference is that a mutual fund holds a lot more stocks than you hold so it is more broadly diversified. A fund like VDAIX Vanguard Dividend Appreciation Index Fund holds 146 stocks that have a history of steadily increasing their dividends over time. The ER is 0.20%. How much are you spending on transaction costs getting in and out of positions throughout the year? Plus by going with an index fund, you eliminate the stock picking and market timing aspect of what you are currently doing. It might be worth looking into.]


    Disneysteve...

    I actually get a kick out of thinking of my 20-25 stock portfolio as my own private mutual fund. But two BIG differences between my portfolio and any mutual fund are that (1) I have control of what's in the portfolio, and (2) the much greater concentration per stock in my portfolio provides a much higher dividend yield (7% - 9% depending on how much is in cash at any given time) than any income mutual fund I know of. (The broad diversification of a large mutual fund has drawbacks as well as advantages.)

    Overwhelmingly, my trades result in either a gain in book value and/or an increase in the aggregate yield of the portfolio. So the transaction costs of those trades is well justified. EXCEPT that most of my trades come to me at zero transaction costs and the rest at $3 or less a throw. And I'm not having a percentage of my entire book value being skimmed off the top by a mutual fund manager every year.

    But the main point of my post, which I don't seem to have gotten across, is that I DO NOT want to be at the emotional mercy of either the market as a whole (index fund) or some yahoo mutual fund manager.

    My way is definitely not for everyone. Maybe no one. And maybe some day it won't even be for me. But today is not that day.

  19. disneysteve Says:

    That all makes sense. You've essentially created your own personal mutual fund which is really nothing more than a portfolio of stocks. As long as you feel confident in selecting stocks and don't mind the maintenance that goes into that, there's nothing wrong with doing it yourself. It's a bit riskier, of course, since it is less diversified, but as you point out, that can result in higher gains.

  20. baselle Says:

    There is nothing wrong with it, but I do find it ironic that you can sleep at night with a riskier portfolio. They are different shades of risk of course, and I myself find that I much prefer the known risk that I take on vs unknown risks and issues that I buy into when I buy a fund. That being said, I'm relatively comfortable with risk in general, and that comfort was tested after having ridden my investments through 2007 - 2009. Doing a little math on your bio (61 vs. 63) I infer that you've only been investing this way since 2010- 2011. Dividend stocks have had a fantastic run since 2009. Even with individual dividend stocks you still WILL be "at the emotional mercy of ... the market as a whole". It will simply feel different. Be careful; nearly everybody can sleep at night these days. Smile

  21. BuckyBadger Says:

    That's an excellent point, baselle. Pretty much everyone with anything in any part of the market has done great lately. The real test is over the long term. It's easy to make money when the market is going UP UP UP by leaps and bounds every day.

  22. llckll Says:

    I definitely like the idea of buying dividend paying stocks. Once we're debt free and max out our IRA accounts, I'm definitely going to start buy dividend stocks on a frequent basis.

  23. cardtrick Says:

    It's all cyclical. Some years dividend stocks are hot and other years, growth stocks are hot. Some years everyone makes money and other years, everyone gets slaughtered. As tempting as it might be, I don't pick stocks based on dividends. I try to figure out what the future of the company looks like.

  24. Retired To Win Says:

    llckll Says:

    January 13th, 2014 at 01:25 pm

    I definitely like the idea of buying dividend paying stocks. Once we're debt free and max out our IRA accounts, I'm definitely going to start buy dividend stocks on a frequent basis.


    Hey, llckll...

    You do not have to wait to buy dividend stocks. You can buy them in your IRA accounts.

  25. Retired To Win Says:

    "baselle Says:

    January 8th, 2014 at 02:00 pm

    ...Doing a little math on your bio (61 vs. 63) I infer that you've only been investing this way since 2010- 2011. Dividend stocks have had a fantastic run since 2009..."


    I actually sold off all my mutual funds in late 2008 and began buying dividend-paying stocks in the Spring of 2009. And, yes, I picked a great time to start doing it; I had better than a 70% gain in book value that first year.

  26. Retired To Win Says:

    cardtrick Says:
    January 13th, 2014 at 08:33 pm
    ... As tempting as it might be, I don't pick stocks based on dividends. I try to figure out what the future of the company looks like.


    Cardtrick...

    Doing that type of research is part of what I do to pick my dividend-paying stocks. It's NOT just about blindly buying whatever shows the highest dividend yield on a particular day. Wink

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