For the past year or so I’ve been dabbling in investing in dividend stocks. At this point I have investments in three individual dividend stocks that I plan to hold for the long term because they’re solid companies with a long history of dividend growth. I also had planned to continue investing in more dividend stocks as extra money becomes available to build my dividend stock portfolio into a well diversified investment machine. I even had the notion that at some point I would have enough diversity in my dividend stock portfolio that I could stop investing in index funds.
Well, I’ve been reconsidering my plan lately. Not because I’m no longer excited by dividend stocks, but because I realize that my plan is incomplete, and therefore a pretty crappy plan.
When I first started on my journey toward financial independence, one of the first things I became interested in was dividend investing. There’s nothing necessarily better about dividend stocks, but they do offer advantages for people who are looking to escape the 9 to 5 job much earlier than the conventional retirement age. The number one advantage is that they’re somewhat more predictable than non-dividend stocks. When the market is volatile, it’s hard to know what your investments are going to do. But if you hold stocks that pay dividends, you can be reasonably sure they will continue to pay you dividends, even if the stock price drops. This gives those of us looking to escape the rat race early a level of predictability that helps us plan our futures. We don’t know what the stock price is going to do, but we know that every year we’ll receive x dollars in dividends.
Dividends will also turn into a predictable cash flow once we achieve early retirement. While we’re building up our investments, we re-invest dividends, but once we’ve established a large enough nest egg so that our dividends are big enough to live on (or big enough to supplement a part time job), we may opt to start receiving dividend checks and living off of truly passive income.
Before I made my first stock purchase last year, I read some investing advice from Scott Adams. Now I know, I should probably be taking my advice from economists, not cartoonists, but the man is just so damn brilliant! And the article was published in the Wall Street Journal, so it’s got to be legit, right? Even his intermittent reminders to ignore his advice don’t deter me! His theory is that you should invest in companies you hate. Why? Because there’s a reason you hate them – they’re giant evil corporations that only care about making money. Sucks for the good of the world, but great for my wallet. But I’m also into dividends, so by combining these two philosophies, I dove into investing with a very clear plan – look at the list of Dividend Aristocrats, and pick the ones I think are evil. And so I picked McDonald’s.
Scott Adams points out the flaws with pretty much every other method of picking stocks, my favorite being this gem:
Perhaps you can safely invest in companies that have a long track record of being profitable. That sounds safe and reasonable, right? The problem is that every investment expert knows two truths about investing: 1) Past performance is no indication of future performance. 2) You need to consider a company’s track record.
Right, yes, those are opposites. And it’s pretty much all that anyone knows about investing. An investment professional can argue for any sort of investment decision by selectively ignoring either point 1 or 2. And for that you will pay the investment professional 1% to 2% of your portfolio value annually, no matter the performance.
So far, I’m not sure there’s a fallacy with this plan. Dividend Aristocrats that I hate seems like a solid investing strategy. Wal-Mart may be next on my list. And I hate Aflac commercials… does that count? The only issue is I’ll run out of suitable investments pretty soon because I don’t know enough about most of the companies to know which ones I hate. Or I could just base it on arbitrary things, like the scrabble score of the ticker symbol… JNJ here I come!!