I’ve
received an e-mail from one of my readers. Here is his mail:
“Dear
Tom,
Want
to let you know that I thoroughly enjoy and appreciate your dividend newsletter
for starters I wish to apologize on behalf of correspondents who are blatantly
rude and disrespectful to you. If I have a disagreement or question for you I
certainly would be polite....common sense.
I
am retired and have money to invest and am concentrating on high dividend
paying stocks. But so far I am making
good money on dividends but am currently getting more capital losses than
capital gains. I have made costly
mistakes but am benefitting from them.
If
you could suggest any strategies plus make suggestions I am ready, willing and
able to digest same.
Very
Respectfully”
Well,
a one way strategy to make money without any losses does not exist. I
personally made losses but they were not significant in relation to my current
unrealized and realized capital gains.
The
first question is in my view how much risk can you shoulder to get a higher
return. I believe that investing should improve your live quality and should
not end in hard work. Stocks and everything surround should bring you fun and cause
in a better life. If you are retired, you have not as much time to wait for
returns as a younger investor.
If
you say that you make losses, I would be curious to know what kind of stocks do
you own and how long do you have them? This is a fact that I hear from several
investors. They receive high dividends but make losses on their assets. I discovered
that it has reasons when companies are low valuated and high yielding. The
truth is that all others know the problems of the company and core investors sell
their stocks before everything is public.
I
don’t like higher yielding stocks like PBI despite the fact that they have
realized a great return since the beginning of this year. The market knows
everything, much more as we all because he is an expression of all contributors
and stakeholders of the company.
My
strategy is to buy stocks and hold them, receiving the dividend and see how my
yield on cost rises in average, year over year. I don’t follow the company’s
happenings in detail. It’s a passive income with passive work but highly scalable.
Back
to your problem. I prefer lower yielding stocks with a higher and more
consistent growth. It’s even better if the company has low debt as well as a
good management team.
As
of now, there are still opportunities with a 3%+ yield of which you can expect
that the income will grow with a rate of 5-7% per year.
When
I buy stocks I always look at the long-term history of a stock. If they doubled
sales every 10 years and they have revenues over $10 billion, I am interested
to discover more of the stock if earnings grew faster than sales. Also
important for me is the stability and volatility of the growth. A highly cyclic
company is not the right stock for me. Finally debt and cash flows matter. The
company must create strong cash and should be able to give shareholder value
back in some way.
If
you start buying stocks and you plan to hold them over a decade or more, your
first years will be the hardest if you are in an overvalued stock market. I
have no idea if the market today is overvalued. It’s primarily a question of
the future growth perspectives from the companies. If a recession comes, a
blast of the Chinese housing bubble or even a break-down of the Euro, the
market is definitely overvalued.
My
approach is that the economy will recover and improve over a long period. It’s
like an economic balance. The only question is “how long does it take” to get
balanced. Since 2008, the market needed five years to get back to the historic
levels. It could also possible that you see decades of slow growth or no growth
– Look at Japan. If you are at the age of 65 or older you must consider this
for your asset allocation.
The
best category to place money is in my view dividend growth from companies with
international sales and future growth potential. Companies like Nestlé, Procter
& Gamble or Nike have a big brand portfolio which produces strong cash
flows and their client basis is still rising. Coca-Cola is the dominating
player in the soft-drink business but they deliver only 1% of the daily
beverage consumption of a person.
A
past performance does not mean that the business model works for the future but
in my view, companies like Coca Cola or McDonalds have a big cash flow and the
best human skills do develop markets better than their smaller rivals. They
handle recessions more effective and gain market share in every depression.
I
reduce the residual risk by putting not more money into a single stock of more
than 1% for a non-core holding. If I am wrong with my company, I could only
lose 0.5% over years if the stock is down 50%. That’s not much when I receive
yearly 3% in dividends from my portfolio holdings.
