12-20-2014, 08:41 AM
(12-19-2014, 03:24 PM)Dividend Watcher Wrote:(12-19-2014, 01:17 PM)simple_is_rich Wrote: I'm asking because I don't want to begin this strategy now if it's not sound. I still have a lot of reading/research/thinking to do before I make any moves, so I'm not in a hurry exactly. Perhaps by the time I'm ready to make a purchase, the market will have corrected down to a more discounted level.
I think you need to sort out your own thoughts on the topic. Any strategy can be successful if you can find the key points and stick to them.
As for dividend growth, DGIs don't necessarily buy just undervalued stocks. Fairly or even slightly overvalued stocks are acceptable to many. Much depends on your age, the time frame you will be investing and what are your goals are. There are some that will only buy when the market has corrected significantly and then hold forever. So yes, some only buy undervalued companies.
For me, with only a decade or so to go before I need to use some of it, putting my cash to work in companies that 1.) pay enough yield and 2.) are not grossly overvalued and let time and compounding do their work seems to be the most valuable strategy. If I was waiting for companies to become undervalued, I may have sat out this incredible bull run for several years. I agree, there's not much that's cheap except for the oil patch right now (hint) but there are still fairly valued companies out there if you are willing to research.
Time in the market and the compounding of reinvested dividends, either in the original company or collecting them and purchasing other companies, are two important tenets that will allow you to reach your goals. Hence it is a long-term endeavor and not the investment "flavor of the week" if you want to be successful with dividend growth investing.
I inferred from your comment that you will be taking some of your mutual fund investments to purchase dividend growth stocks. If so, it could be a zero sum game. By the time you make a decision to purchase something and the market has corrected, your mutual funds have also corrected.
Hey Simple! On this point, I'd just add that your concern is true of the market generally, whether you are buying index funds, other mutual funds, or individual stocks. With any of these equities approaches, if you are buying at high / overvalued prices, you're looking at diminished returns going forward (relative to buying at more favorable valuations).
When you pick individual stocks (whether part of a DG approach or not), you have the advantage of controlling better the valuations you'll accept. Even in a market that *feels* high or overheated, you can find things that are relatively well-priced. The recent swoon in oil stocks is a great example.
So I guess I would say that the "soundness" of the DG strategy is not implicated, as a general matter, but the relative dearth of bargains, compared to a few years ago. Though I certainly agree that it is harder now to buy with confidence than it was back in 2009 through 2012!