Wednesday, April 6, 2011


          Investment show experts take jabs at investors who buy companies because of the dividend.
  They accuse us of chasing yield at the expense of stock price appreciation. These experts tend to be traders.  Even those who call themselves investors can make fun of us.

          Their argument is that a company should be using cash to buy improved technology, broaden market share or invest within the company in ways that increases growth.  Increasing growth, or the perception of increasing growth, will lead stock prices higher.

          That philosophy is fine if you can afford to take the chance that the company makes the right decisions and growth really occurs.  Look at Apple as an example of good growth strategies and look at Cisco as an example of bad growth strategies.   You never want to have to sell a stock just to make your monthly bills.  You just might have to sell at a price lower than you want to maybe even at a loss.
          Income investors need growth in their income portfolios too.  All you need to do is look at the cost of your taxes, homeowner’s fees, gasoline, sewer tax, milk, cereal, or water bill, and you know that you need more money in 2011 to pay your monthly bills than you needed in 2001.  Therefore, income investors need dividends to increase.
          As you know, I separate dividend companies into two groups.  One group I call dividend machines that have at least a 3% yield, earn more than they pay out, are solid companies with little or no debt, and have increased their dividend every year for a minimum of five years.  The second group I call “almost” dividend machines.  They still have to earn more than they pay out and have a solid balance sheet, but may not meet the 3% threshold.  When you find one of these companies that also increases the dividend every year, you tend to get both growth and income.  Moreover, the income grows every year.
          Two stocks I have profiled in the past are good examples.  JNJ is a dividend machine that has increased the dividend every year for 48 consecutive years.  With stock like this, you should not have to sell your position just to make your monthly bills.  IBM is an “almost” dividend machine that has increased the dividend every year for 15 years.  In addition, this company’s stock price has more than doubled over the past 3 years.  Facile income investors can take a stock like IBM ride it up; take some of the gain and plow it into JNJ or another dividend machine and pretty soon you will be shocked at the steadily increasing income you get from your income portfolio.
          You have heard the phrase “money makes money.”  This is how income investors make money make money.

Very Truly Yours,