Saturday, January 05, 2008

Review on "The Dividend rich investor - Building wealth with high-quality, dividend paying stocks"

Stupid advertlets...they never pay money to host their site, so when I logged into my blog, I kept on being directed to another site. Haha, looks like they owe money run away already...

Enough of that.

I finished reading the dividend book...managed to complete reading it in a day. I never knew I could squeeze so much time if I had to, though it is quite tiring. These are the few things I thought it's important:

1. Instead of calculating % yield (formula: dividend for whole yr/current market price of stock), we can calculate the % yield relative to cost price (formula: dividend for whole yr/price at which you buy). This means that after you buy the stock, the share price will not change anymore.

2. It is possible for the dividend paid out to be equal to the price of the stock after a period of time. That means that if you buy and hold while getting dividends invested throughout the years, it's possible to own a stock for free. I think it's almost like buying a property - rental collected will pay for the mortgage until it is fully paid for. In which case, the property becomes 'free', yet it can still generate income for you. Robert kiyo's favourite.

3. Be careful about buying stocks just for its high yield. High yield happens could happen because there is some trouble, so the share price drops, bringing up the yield. Yield could also be high because the dividend paid out is very high, perhaps due to divestment of business or some other one off event. If it's the first reason (share price drops), then we have to analysis whether the fundamentals is still sound. A good example would be the subprime issue, where a massive selldown cause a lot of dividend stock to reach sky high yield (10% to 12%, I heard for some REITS). This is where a cool head should analyse to see if the selldown of the stock is due to external or internal problems relating to the stock itself. If it's the second reason (high dividend payout), then usually the price will rise to accomodate it...if the price didn't go up despite the announcement of high dividend, ask yourself why. In summary, always find out why it has high yield before jumping in. It just shouldn't be the only criteria to invest.

4. The book said that ideally, before investing in divided yielding stock, we should check a few things.

a. payout ratio (formula: dividend payout/total earnings) - check payout % against industry's average to see if it's on the high or low side. This is to get some clue as to how sustainable the dividend is. If it didn't give any clue on that, at least you'll know whether it's on the high or low side of the industry.

b. cash flow - ideally should be 3 times the dividend paid out per annum. I do not know why 3 and not 2.5 or 4. Perhaps the rationale is to ensure the sustainability of the dividend again. I heard of companies with liquidity problems but they still borrow to give dividend. Or maybe high earnings, low cashflow, but still give dividend...

c. P/E ratio. Can't really remember what is said for this as my mind auto shut down when I see PE. I think the point is to link the yield to the earnings. You know, high yield could be low price, but if P/E is very low, might mean a bargain. MIGHT.

5. A few sectors give good dividends. Financials. REITS. Utilities. These are the 3 that I can remember. But each one have different characteristics...have to examine more in detail.

6. We can use dividend yield as a gauge to whether the stock is over or under valued. But firstly, we need to find out the historical high and low yields. If the yield currently is high (meaning price is low), then value hunters will step in to support the stock. If the yield is low (i.e. price too high), then it might be a overvalued, consider selling?

7. Dividend yielding stock give two kinds of returns to investors: dividend and capital appreciation. In bad times, where capital appreciation is put on hold (a more likely case is capital depreciation!), the only way to earn from the market is from dividend. Price might drop but it will be supported at some point because the yield becomes higher and higher while the price drops. Growth stock without dividend might not be so bear-proof. So even in bear market, total returns of a stock might be 1-2%, also better then nothing.

8. To find out how long it takes for x% returns to double your money, use the rule of 72. Take 72 divide by x - that will give the number of years to double your money (assuming reinvested and compounded annually). To find out how long to triple your money, use the rule of 115. Take 115 and divide by x.

Magic rate is 15%...because at 15%, 5 years is all it takes to double your money. 7.7 years to triple your money. No joke.

That's all I can remember.

Today I bought Security analysis from MPH, because when I tried to order from Berkshire business books, they told me it's out of print (and have to ask the publisher to print it!). That will take 1.5 months and above. It's not acceptable for me, so I grabbed it from MPH. It's not an easy read, from what I see.

Going to read "The little book of Common Sense Investing" by John C. Bogle. Know who is he? He's the founder of Vanguard Group, a fund house in US. Can't remember whether I've read this book...good to re-read this again even if I did. Perspective is definitely different for me this time round.

6 comments :

H said...

Thanks for the summary LP.

I include high dividend, defensive stocks into my portfolio as "cash cows". They must have a yield better than bonds and consistent earning increment. This kind of stocks may not grow much but they have plenty of cash and do not expand aggressively, so they rather distribute out the money. (usually have a long history of consistent earning and dividend history)

I will buy with an attractive initial yield,(margin of safety) as seen by the p/e ratio. (usually have to wait for opportunities like market panick, like 17 aug or in one particular case, an insider selling because he needs to start another company!)

I treat them almost like CASH, so when in need, I may liquidate it for better opportunities. ((like when C crashed to 20)

Right now, most of my shares are dividend paying. Some pay little, like hsbc as they have better use of the $. (hence the script dividend too, to retain the $ in the company)

*John Bogle is good; good funds as an alternative to stocks with superb return. Maybe just what you are looking for, for your monthly saving. :)


HH

la papillion said...

Hi HH,

Thks for ur comments :)

The book really enlightened me, because when I started I read some book that says not to invest in dividend paying stocks as they have no money growth potential. It's a bit extreme but the idea got stuck in my head and I had a subconscious bias against dividend stocks until singpost.

I think a good dividend stock at least satisfy these criteria:

1. Long payout history (5-10 yrs)

2. Current yield > yield of index (and also more than long term bond yield which is around 3-4%)

3. Stable or growing earnings (so that the dividend can be consistent or grow) over a long period (5-10 yrs)

4. Strong and stable cashflow (shouldn't dip into negative nor padded with excessive debts)

Any more to add?

Derek said...

Hi LP,

You really can read. I also have the Security Analysis - The Classic 1951 Edition and I agree that it's one intense book. I just couldn't go pass the first few pages.

I'm looking for Peter Lynch's books as his investing style suits me - investing in what you already know. Sadly, there ain't many of Peter Lynch's books around and I may need to buy from Amazon.

Cheers!
Derek

la papillion said...

Hi derek,

Haha, going to read security analysis soon. I'll tell u how i feel about it when i do :P

I managed to find some on peter lynch on berkshire business books for you.

http://www.berkshirebusinessbooks.com/book_search_results.php?PHPSESSID=ea183910286fe03a46ae6e088d65b23a&searchText=peter+lynch&searchMe=Authors&searchme=Search

I think get from here, should be cheaper than amazon. Check it out.

Derek said...

Thanks for the recommendation LP. The place is just next to my company and I didn't notice it. I can save on the delivery fee.

la papillion said...

Derek,

Haha, lucky you :P They do have a number of outlets located in various places in singapore. If you buy above $75, they'll deliver free for you. If u wanted an item and they don't have it right away, they'll also deliver for you.

Great and cheap :P