Never forget these two axioms:
Money frees us, but its pursuit may enslave us.
It’s not how much you have at the end; it’s how much you could have made.
Happy Thanksgiving to you and your family!!!
I’m thankful for many things, but as far as this blog…I’m thankful for all the subscribers, viewers, and support I’ve received over the past year. I’m truly blessed, honored, and incredibly grateful.
I’m no blind follower of popular will, but I do pay attention when multiple people ask the same question and others are critical of my investing strategy (which has certainly done well for me, but is always worth re-examining).
The question…uh…er…in question is the following:
Why is individual stock investing as desirable/more desirable as index fund investing?
Related to that question is if individual stock investing is worth the extra work (if you want to call it that) and even risk compared to index funds.
To answer that question, I need to clarify essentially what my investing strategy has been in a chronological sense.
- Index Funds
- Mutual Funds
- Dividend Growth Investing
- Growth Stocks Buttressed By Secular Trends
- Alternative Investments (eg, real estate, franchises, businesses, etc.)
I started investing early and often thanks to my parents (Thanks Mom and Dad!! Love you guys and can never thank you enough for the amazing life you’ve given me) and once I built up a critical mass (a subjective measure to be sure) of index funds and mutual funds, I then moved down that list one by one—only moving to the next one after reaching what I believed to be critical mass in terms of the amount of money invested in the current category. As you can see, each category carries with it more work and more risk as well. We can and will get into these categories one by one over the coming weeks and months.
So…after that brief interlude and window into my investing life, let’s get into individual stock investing. As you can see from above, the first grouping of individual stocks, I seek stocks with dividends where the company consistently increases the dividends year after year. This selects out many stocks—non-dividend payers, companies paying out dividends just recently (for me, that’s 25 years or less), companies with longer term dividends, but are ones that have neither increased the dividends or even worse dropped their dividends over time, etc.
So, in other words, the companies I am seeking are large companies with a good easily understood business model and a long history of strong profits with consistent dividends that are steadily increased year after year regardless of the broader economy or gyrations of the stock market.
These types of companies are relatively rare when considering that there are over 17,000 publicly traded companies and there are less than a few hundred companies that fit the bill. The good thing is that there are far more companies like this than any average Joe and Jill Investor would ever put their money into.
These are so valued, desired, and tracked enough that they have acquired names for themselves.
Dividend Challengers: companies who have increased their dividends for 5-9 consecutive years
Dividend Achievers: companies in the S&P 500 who have increased their dividends for 10-24 consecutive years
Dividend Contenders: Same as the above, but not only in the S&P 500
Dividend Champions: companies who have increased their dividends for 25-49 consecutive years
Dividend Aristocrats: Same as above, but all the companies are only in the S&P 500
Dividend Kings: companies who have increased their dividends for at least 50 consecutive years
Most people stick to one or other (S&P 500 or S&P 500+ all other stocks of any kind) classification system. Of note, the “dividend kings” is not a category that is universally accepted and only used by some (though everyone should recognize what its definition is when everyone it is thrown around).
So, these lists are not static obviously. The best companies move from one list up towards another once they have achieved ten, 25, or even 50 consecutive years of dividend increases. The less fortunate companies fall off the list after one year of not increasing their dividend. REMEMBER THIS: It’s not missing a dividend payout that gets you scratched off the list; it’s simply not increasing the dividend from the prior year that gets your company bumped off the list.
Take the example of Johnson Controls which paid out higher and higher dividends for 31 consecutive years from 1985-2016 until they could no longer increase it. They never stopped paying the dividend and even increased its dividend in subsequent years. However, just for missing one year out of the past 33 years, Johnson Controls went from being a Dividend Champion and eventually on its way to becoming a Dividend King to not even being a Dividend Achiever currently.
One missed dividend payment increase (even if you still pay out a dividend that year in question)…no matter for whatever reason…and you’re out.
Brutally unforgiving system…which is good for us as investors.
There are 25 Dividend Kings, 50 Dividend Aristocrats, 115 Dividend Champions, 220 Dividend Contenders, and 265 Dividend Achievers. Dividend Challengers are harder to nail down as there are approximately 150 companies, but more are being added before the end of this year assuming the dividend increase(s) occur.
Now that we have categorized the different dividend growth stocks, let’s delve into the whys of dividend growth investing versus index fund investing alone…next time.
I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.
Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.
Eat heartily and have a great holiday!
Until next time…