10-07-2015, 11:04 AM
This is a great topic, and for me comes down to a question of style purity.
What you are describing, I think, is layering some value investing principles on top of your base dividend growth approach. I think the idea has merit, though I have not been brave enough to wade into those waters myself. Pure value investors buy low, wait for the price to revert to fair value or better, then sell. Rinse and repeat.
To me, strict dividend growth investors don't generally adopt this practice. They are focused on income and the safety / growth of the dividend stream. Their sell criteria are tied to those metrics and not to valuation. (And this is NOT undermined by the fact that their buy criteria is often very focused on valuation.)
I've often said that the first approach, the value approach, is far more likely to make you rich while you are young enough to enjoy it -- but only if you can do it right. But in my opinion, it is much harder to get right that a more pure dividend growth approach. I personally do not have the time or skill to make that strategy work. I do (I think!) have the time and skill to make a dividend growth strategy work.
I've often been tempted to try and combine the two approaches in a way similar to what you are describing. Stick mostly with a pure DG strategy, but be open to selling when one of my holdings appears truly overvalued and I could replace it with another DG stock of high quality and low valuation. I've been eyeballing WBA lately with these thoughts in mind. I've got a nice double on the price, and could replace the 1.7 percent yield with something much higher (EMR, PH, or even JNJ). But is WBA excessively overvalued? I don't think so. With earnings increasing after the merger, we could be looking forward to some solid dividend growth. So I'll probably just sit tight.
KenBob -- would you be willing to share some specific examples of trades you've made or contemplated along these lines?
What you are describing, I think, is layering some value investing principles on top of your base dividend growth approach. I think the idea has merit, though I have not been brave enough to wade into those waters myself. Pure value investors buy low, wait for the price to revert to fair value or better, then sell. Rinse and repeat.
To me, strict dividend growth investors don't generally adopt this practice. They are focused on income and the safety / growth of the dividend stream. Their sell criteria are tied to those metrics and not to valuation. (And this is NOT undermined by the fact that their buy criteria is often very focused on valuation.)
I've often said that the first approach, the value approach, is far more likely to make you rich while you are young enough to enjoy it -- but only if you can do it right. But in my opinion, it is much harder to get right that a more pure dividend growth approach. I personally do not have the time or skill to make that strategy work. I do (I think!) have the time and skill to make a dividend growth strategy work.
I've often been tempted to try and combine the two approaches in a way similar to what you are describing. Stick mostly with a pure DG strategy, but be open to selling when one of my holdings appears truly overvalued and I could replace it with another DG stock of high quality and low valuation. I've been eyeballing WBA lately with these thoughts in mind. I've got a nice double on the price, and could replace the 1.7 percent yield with something much higher (EMR, PH, or even JNJ). But is WBA excessively overvalued? I don't think so. With earnings increasing after the merger, we could be looking forward to some solid dividend growth. So I'll probably just sit tight.
KenBob -- would you be willing to share some specific examples of trades you've made or contemplated along these lines?