“Mathematics, rightly viewed, possesses not only truth, but supreme beauty — a beauty cold and austere, like that of sculpture, without appeal to any part of our weaker nature, without the gorgeous trappings of painting or music, yet sublimely pure, and capable of a stern perfection such as only the greatest art can show. The true spirit of delight, the exaltation, the sense of being more than Man, which is the touchstone of the highest excellence, is to be found in mathematics as surely as poetry” – Bertrand Russell
Ever since I was young, I was always good with numbers. I picked up new mathematical concepts very easily even though many were abstract. Once I started studying finance, and real money was involved, it became even easier to grasp many of the concepts.
Wall Street tends to embrace complex systems. Maybe because the creators of these systems think that the complexity will make it more successful, or maybe they believe that because it is complex they have found the holy grail of investing/trading. While these systems are interesting to me on an academic level, in my 15 years of working on Wall Street and studying what works, the conclusion I have reached is that simple is better.
“Make everything as simple as possible, but not simpler.” – questionably attributed to Albert Einstein
I have seen simple investment systems, multi-million dollar trading systems which require astrophysicists and rocket scientists to run, and everything in between. With all those reference points, one thing that has become crystal clear, adding complexity does not necessarily make things better.
Investing in dividend stocks is not only easy to understand but provides insight into some of the great investment strategies of our time.
This is part 3 of 6 in a series about dividend stocks and dividend reinvestment. This post will be shorter than the others, but the concepts should be rather simple to explain and they are referenced in other posts with more detail.
Many investors look at investing in dividend stocks as a conservative way to invest in stocks. Even by Wall Street’s standards, dividend stocks are seen as a way to invest in stocks with a conservative risk profile.
I don’t view them that way.
Yes, companies that pay out dividends over long periods of time tend to have more stable businesses, but it is not always the case. In the past decade, we have seen some examples of companies, which had produced decades of consistent dividends, either cut or eliminate their dividend due to some significant unforeseen event.
British Petroleum (BP) had a liability exposure to the oil spill in the Gulf of Mexico in 2010. This exposure caused the company to eliminate the dividend for the first time in 10 years. Since then it has slowly added it back, but it still has not reached its former level prior to the event. Today, the company pays out $2.34 in dividends annually, which is less than the annual $3.36 which they paid out prior to the oil spill.
Many banks and financial service firms had paid out consistent dividends for decades until the global financial crisis in 2008. Due to the crisis, any bank which took TARP money was required to virtually eliminate their dividends until TARP was paid back. Take Citigroup for instance. Before the financial crisis they paid out a quarterly dividend of 3.20 per share, and now they only pay out $0.01 sh.
A company paying out dividends is not a guarantee that they will continue to pay them out, and it certainly does not make the company safer.
If the dividends are not safe, then why then would you invest in dividend paying stocks
The reason for investing in stocks, which pay consistent dividends, is that they tend to have certain characteristics that make them desirable as an investment. A strong balance sheet, consistent cash flow, and a moral obligation to continue to pay the dividends even if the economy slides into a recession. No investment is without risk. However, even with the normal risks of owning stocks, dividend stocks tend to have more desirable characteristics. Here are some ways that dividend stocks can help you grow your wealth.
The three secrets which can make you a world-class investor.
I will not be covering how to pick the best dividend stocks in this post. I may decide to discuss some of our methods at a later date, but that topic would require a separate series of articles. If you are interested in learning more about how we manage portfolios with dividend stocks, click here to contact us.
Once you find the appropriate dividend stocks for your portfolio, you can utilize these three strategies to enhance your wealth at an exponential rate.
1 – Time
The most important factor of investing is time. If you are expecting to get rich overnight, then you should take a trip to your local casino. Investing is not gambling… if it is done correctly, see my prior post for more detail on this concept.
Warren Buffett has grown his company’s book value at approximately 20% per year for the past 48 yrs1. This didn’t happen because he got lucky investing in IPOs or hot trends. He was able to grow his wealth consistently because he invested in strong businesses with consistent cash flow that was able to reinvest it into endeavors which compounded the growth of the investment.
2 – Dividend Reinvestment
When you find a company paying consistent dividends, reinvesting those dividends back into the company which paid them allows you to take advantage of the principal of compound interest. As I noted in my prior article in this series about dividend stocks, Dividend Stocks – This one secret could significantly increase your returns with one quick phone call, if you reinvest your dividends, it can allow you to compound your returns in that stock. If you choose your stocks well, as Warren Buffett has, over time this compounding will allow you to amplify the dividend returns from your original investment.
3 – Dividend Growth
This is the subject of my next article, “If your dividend stock has this one thing, you could exponentially increase the returns from your dividend stock investments.” While I don’t want to spoil the surprise, I can tell you that this secret is an important piece of the dividend puzzle. Investing in a stock that pays dividends and doesn’t grow over time is similar to buying a bond. If you can find an investment that can grow its payments to you, you will wonder why you ever considered investing in “trendy” stocks.
How can I learn more about investing in dividend stocks?
This is the third article in a 6 part series about dividend stocks. The next article, “If your dividend stock has this one thing, you could exponentially increase the returns from your dividend stock investments.”, will discuss what to look for in your dividend stocks to allow you to amplify your returns over time. This is one of the most important characteristics of a dividend stock when you are researching them. Read more about this next week. We also have a dividend stocks FAQ page for additional information about dividend stocks.
1) 2013 Berkshire Hathaway Annual Report
About Innovative Advisory Group: Innovative Advisory Group, LLC (IAG), an independent Registered Investment Advisory Firm, is bringing innovation to the wealth management industry by combining both traditional and alternative investments. IAG is unique in that they have an extensive understanding of the regulatory and financial considerations involved with self-directed IRAs and other retirement accounts. IAG advises clients on traditional investments, such as stocks, bonds, and mutual funds, as well as advising clients on alternative investments. IAG has a value-oriented approach to investing, which integrates specialized investment experience with extensive resources.
For more information, you can visit www.innovativewealth.com
About the author: Kirk Chisholm is a Wealth Manager and Principal at Innovative Advisory Group. His roles at IAG are co-chair of the Investment Committee and Head of the Traditional Investment Risk Management Group. His background and areas of focus are portfolio management and investment analysis in both the traditional and non-traditional investment markets. He received a BA degree in Economics from Trinity College in Hartford, CT.
Disclaimer: This article is intended solely for informational purposes only, and in no manner intended to solicit any product or service. The opinions in this article are exclusively of the author(s) and may or may not reflect all those who are employed, either directly or indirectly or affiliated with Innovative Advisory Group, LLC.