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Weekend reading: Keeping your Dividend Edge

Weekend reading

Good reads from around the Web.

I first encountered Todd Wenning’s writing when he was working as an analyst for The Motley Fool UK on one of its newsletters. He had a real knack of bringing complicated active investing decisions down to earth.

Todd went back to the US, but for years his British fans were still able to follow his writings via a blog (now discontinued), which I featured in Weekend Reading more than a few times.

Now Todd has published a book: Keeping Your Dividend Edge.

I’ve read it and found it a slim but deceptively deep dose of wisdom for anyone who has decided to try to pick stocks in the pursuit of long-term income.

This is not a beginner’s guide to investing – it’s more a collection of interesting notes from a fellow investor who clearly has experience in the field. (It reminded me a bit of Anthony Bolton’s Investing Against the Tide in that respect.)

As such Keeping Your Dividend Edge is probably not for someone looking for their first investing book – and obviously it’s not required reading for Monevator’s legion of passive investors, either.

But if you’ve decided that dividend investing is for you and you already know how to wield a P/E ratio, then you’ll find plenty here to digest and put to work.

Todd agreed to answer a few of my questions, too.

Dividend investing is as old as the stock markets, so what did you hope to bring to the table with Keeping Your Dividend Edge?

The core tenets and advantages of dividend investing remain intact, though the environment in which we operate as dividend investors has changed considerably over the last 10-15 years.

Can you give us some examples?

Sure. Firstly, the increased popularity of share buybacks has required company executives and boards of directors to re-evaluate how they think about returning shareholder cash.

In the past, the dividend was typically the sole means of returning shareholder cash, but now companies can also consider buybacks as an alternative.

Buybacks can be great as long as the company is repurchasing its stock at a material discount to its fair value – thus transferring value from selling shareholders to ongoing shareholders – but relatively few CEOs and CFOs have proven to be particularly skillful at this.

Regrettably, few companies have a well-defined buyback policy like they may have with a dividend policy, leaving it up to shareholders to decipher their strategy.

With many dividend-paying companies also implementing a buyback program, dividend investors can’t wish buybacks away.

As such, you should know how to evaluate a company’s buyback philosophy and track record.

Of course those dividends aren’t guaranteed either…

Yes, the financial crisis and the heaps of dividend cuts that occurred in 2008 and 2009 left a few scars.

A number of U.S. and U.K. companies with long track records of maintaining and increasing their dividends suddenly slashed their payouts.

To many, the idea of an inherently ‘safe’ dividend went out the door when this occurred. It’s therefore important for dividend investors to be more vigilant – yet remain patient – when evaluating prospective and current holdings.

Is it at all realistic to expect dividends for life in today’s rapidly changing world?

Intensifying competition due to technological innovation and global economic participation means that today’s giants could have shorter shelf-lives than they might have had a generation ago.

It’s not enough to invest in a company that’s doing well today and assume competitors aren’t taking notice and finding ways to eat away at their profit margins.

When Amazon CEO Jeff Bezos said, “Your profit margin is my opportunity,” he wasn’t joking around.

In my book, I aim to provide dividend investors with some tools and strategies for addressing these new factors.

I know you’re operating in the US now. Is your book equally relevant to UK stock pickers?

Experience has taught me that good investing principles translate well across borders – and I certainly hope that’s what I’ve done here.

You’ll have to forgive my American grammar and spelling, of course!

How should individual investors invest if they hope to do better than professional income funds?

The biggest advantage that individual investors have over professional money managers is their ability to be patient. It’s a massive edge that shouldn’t be underestimated.

The more you invest in businesses that you understand and the longer you extend your average holding period, the more likely you are, in my opinion, to have an edge over most professional income funds.

As Buffett has written, “The stock market serves as a relocation center at which money is moved from the active to the patient,” so erring on the side of patience tends to be a good strategy.

We welcome all sorts of investors here at Monevator, but as you may know our main focus is on passive funds and ETFs. So do you have an opinion about dividend ETFs, such as the iShares UK Dividend Aristocrat ETF?

The biggest thing to know with dividend ETFs is how they are structured.

Are they yield-weighted, dividend-weighted, market-weighted? When do they rebalance? And so on.

In the book, for example, I highlight a U.S.-based dividend ETF that invested heavily in banks leading up to and during the financial crisis precisely because those shares were among the highest yielders in the S&P 500. As you might have guessed, this had a bad outcome

So while I don’t have anything against dividend ETFs on the whole, they’re not all created equal. You still need to do some homework.

Are the old favourite dividend paying stocks overvalued in today’s low yield world?

There’s some mental comfort that comes along with buying the well-known blue chips, the Dividend Aristocrats, and so on.

At times, investors pile into them when they’re feeling risk adverse and drive up their valuations. Indeed, these can be very good companies to own at the right price, but if you’re looking for differentiated dividend ideas, you need to look elsewhere.

So where else might we be fruitfully looking?

This might be heretical in some dividend investing circles, but sifting through companies that have recently cut their dividends can be a fruitful exercise for more enterprising investors. Following a dividend cut, many income-minded shareholders have already folded and the company could be eager to re-earn their confidence by rebuilding the dividend in the subsequent years.

To illustrate, companies like Dow Chemical and International Paper in the U.S. slashed their payouts during the financial crisis and today pay higher dividends than they did in 2008. This strategy isn’t without its risks, of course, but it is an area where you might be able to find differentiated ideas.

Todd Wenning, CFA is an equity analyst and writer based in the U.S. His opinions here are his own and not those of his employer.

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

  • Are European stocks cheap or is the US expensive? – A.W.O.C.S
  • Why “dead money” stocks can still be valuable – Oddball Stocks
  • Is Google’s Go-winning AI the future of active management? – E.Q.

Other articles

Product of the week: ThisIsMoney reports on the soft launch of the Government’s new online state pension forecast tool. If you’re willing to register and handover some private information, you can test it here.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1

Passive investing

  • Vanguard to launch cheap target-date funds in UK – Telegraph
  • One Vanguard, many DFAs – Morningstar

Active investing

  • What if Big Oil refuses to hunt for oil? [Podcast]Motley Fool US
  • Are the best days over for UK active funds? – Trustnet
  • Why founder-led companies outperform the rest – HBR
  • The fall of China’s hedge fund king – New York Times

A word from a broker

Other stuff worth reading

  • NS&I hacks back rates and Premium Bond prizes – ThisIsMoney
  • How to eat well AND sleep well in retirement [Search result]FT
  • Wait until 2019 if you want a buy-to-let property [Search result]FT
  • Stamp Duty ‘loophole’ that could save buyers thousands – Telegraph
  • Beware the Airbnb guests who could cost you your home – Guardian
  • Six things that became more expensive on April 1 – Guardian
  • Londoners who decamped to fantasy countryside lifestyles – Telegraph
  • Why I don’t make financial decisions on my smartphone – NY Times
  • Apple at 40: The forgotten founder who gave it all away – BBC
  • How Jeff Bezos became a power beyond Amazon – Fortune

Book of the week: Er, did you miss all that stuff I wrote above about Keeping Your Dividend Edge? Think this is an All You Can Eat buffet? It’s Saturday – I have some serious procrastination to be getting on with.

Like these links? Subscribe to get them every week!

  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. []

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{ 11 comments… add one }
  • 1 dearieme April 2, 2016, 4:40 pm

    I suppose the BTL racket had to end some day; those who did well at it couldn’t resist boasting at the tops of their voices, which would surely attract the media’s, and therefore the Chancellor’s, attention. I hope that things don’t become uncomfortable for tenants and would-be tenants.

    Oh well, there is probably no good solution short of building more houses and the infrastructure to serve them. I gather that we may not have the construction labour to do this on a large scale.

  • 2 webnibbler April 2, 2016, 7:57 pm

    Good to read that Vanguard are introducing their target-dated funds to the UK. While the LifeStrategy funds are great for the passive investor, it still requires a life-styling strategy of some sort. This seemed to me like a big missing component of an otherwise great range of funds. Hopefully the new range will prove to be the full package and truly turn passive investing catatonic.

  • 3 Minikins April 2, 2016, 8:52 pm

    Thanks for the links and an interesting interview.
    Lots of reassurance coming over here from across the pond recently.
    The TEA post by Jim Collins made me think. I know it’s well trusted but how can Vanguard investors really be so reassured based on their structure? Isn’t there still risk (as with all investments) within the funds? Maybe I’m missing the point but don’t they still have directors (not saints) at the table?

  • 4 david April 2, 2016, 9:49 pm

    Re Van target date: “While the investor is still 20 years or more from their target date, the funds will have a stock market weighting of 80pc.”

    I think this is compared to 90% stocks exposure for US versions, e.g. the 2045 one:

    We can also compare differences in the Lifestrategy funds, with the American versions being a simple four-fund portfolio (domestic and international stocks and bonds), while the UK versions have about 10 or more funds for whatever reason (to more easily balance different regions maybe). I imagine the UK Target Date funds will also have this complex arrangement too.

    “Investors can buy the funds through Alliance Trust Savings, Fidelity Personal Investing, Hargreaves Lansdown and Aviva Investment Account”

    Not Charles Stanley? Boo!

  • 5 Aron April 2, 2016, 10:46 pm

    Interesting read about the target date Vanguard funds. My SIPP is with Fidelity so might be a good option to go for. At the moment I choose my percentage rather than Lifestrategy.

    Will definitely get Todd’s book, his blog is full of useful information that’s been really helpful to me.

  • 6 magneto April 3, 2016, 12:11 pm

    Thanks TI for the heads up to the book, and in particular the question and answer session. Maybe TI could interview other investing experts in a similar manner in future?

    Even passive investors can draw some lessons, esp :-
    “The biggest advantage that individual investors have over professional money managers is their ability to be patient. It’s a massive edge that shouldn’t be underestimated.”

    Really struck home, and must somehow remember this advantage!


  • 7 Planting Acorns April 3, 2016, 5:14 pm

    @Dearime http://www.telegraph.co.uk/women/life/flat-sharing-at-40-the-thought-of-owning-property-again-is-daunt/

    I’d say writing BTL off whilst there’s newspaper articles about women happy renting into their forties might be a bit premature…

  • 8 Mathmo April 3, 2016, 7:36 pm

    Thanks for the links this week, TI.

    Thin pickings on the blogs this week (I’m afraid I’m a grumpy soul who despises April Fool posts). I liked AWOCS analysis, but I can’t tell what currency the comparison is in: if it has skipped over the huge surge in the $ as the results of index growth tend to be in local currency. As UK people, the huge uncertainty over Brexit and the US strength represents a super opportunity to repatriate a bit of that US growth (S&P TR has never been higher in GBP terms, I think, at least a 2-year peak). As far as I know the best way to tell this is to look at LON:CSP1 and hope that tracking and costs aren’t too much…
    Of course it would all be much easier if we could just agree to price everything in oz of Gold… 😉

    And then I read The Return To Work. Wow – what a labour of love (/hate – delete as appropriate). Worth a read to remind yourself what a bad day at work looks like. The grass is always greener, so worth taking a sample with you when you cross the fence. Although it’s also a reminder about pragmatic happiness: if you looked that day’s write-up in the morning before it happened, there are a number of things that you’d choose to do differently that would result in a better outcomes (do what the man says!). On reflection, I’m reminded of the anti-conclusion from Ermine’s epic work last week that 30 years doing something you love isn’t something to be escaped as much as 20 years hating your job.

    I’m beguiled by HBRs founder-manager findings. Is it true because I want to believe it, and observation bias or is there causation? And the FTs Eat vs Sleep is another look at variable SWR, but is sloppily worded so I suspect the thinking is sloppy behind it too.

  • 9 The Investor April 3, 2016, 9:54 pm

    @all — These target date funds indeed make it all almost too easy (at least from the perspective of someone who has written an investment blog and needs to find things to tell people). Thank goodness for tax / ISA complications / active investors / passive nerds and the return factors. They might keep us in business… 😉

    @Minikins — Well, I think it’s probably as safe as they come but I still agree with you and I would never have all my eggs in one basket / all my assets with one fund manager. See: http://monevator.com/assume-every-investment-can-fail-you/

    @magneto — I suppose I could… Todd was great with his answers though. That’s what is really important with these sorts of interviews, not my fairly straightforward Paxman impersonation… 😉

    @P.A. @Dearieme — I don’t know, I just don’t know. I’ve got the 1000-yard stare when it comes to the unstoppable UK property market, after 15 years of being on the wrong side of it. It’d be nice.

    @Mathmo — Cheers. Related to those horror work diaries, I used to keep (still have them somewhere) 2-3 printouts of particularly unbearably petty memos/stupid bossy emails that I kept from one of my short stints as an honest dayjobber to remind myself at any low points as a freelance just how ridiculous office life can get. (I was going to go into the details of them, but as soon as I started typing them I felt my back tense and my neck stiffen. It’s a Sunday night, I don’t want to spoil it. 🙂 )

  • 10 Learner April 3, 2016, 10:43 pm

    @Acorns: interesting that all three women interviewed had either owned property previously and sold, or still owned while renting elsewhere. Different attitude to renting when it’s by choice.

  • 11 Planting Acorns April 4, 2016, 9:34 am

    @Leaner… Interesting from a personal perspective, but never the less whatever their attitude I wouldn’t call the end of BTL whilst they’re pairing up and renting at 40…

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