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.

• Keeping Your Dividend Edge is out now at Amazon.

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Two and a half years ago I’d saved enough in cash and index funds to pay off my mortgage.

I didn’t do it.

Instead I cooked up a clever-clever plan to slowly pull out of equities over the next eight years – hoping to squeeze a little more from the upside along the way.

I’d won the game but I kept on playing anyway.

The Investor asked me to tell you what happened next.

Here goes…

What happened next

What happened was that I found out a lot about myself – especially my ability to tolerate risk

A reminder: Half of my mortgage repayment fund was sat in cash, half in equities. The idea was that instead of wholesale withdrawal, I’d stage an orderly retreat that would put me 100% in cash by 2021.

But no plan survives contact with the enemy. Especially when the enemy is me.

When I sketched out my scheme, I thought the enemy was a remote nightmare scenario where Mrs Accumulator and I both lost our jobs while equities crashed like a meteor to Earth and interest rates plumed like so much radioactive dust.

And in 2013, the recovery from financial Armageddon 2008-style felt like it had some way to run.

I didn’t want to miss out on the boost that staying strong in equities could give me as I pushed towards my next summit: financial independence.

It was a calculated risk, and some readers warned me against it. Their concerns mostly related to a deep personal hatred of debt.

If you have it, get rid of it. Don’t take chances. Cut your chains as quickly as you can and get the hell out of there. Don’t saw halfway through the manacles then hang about pulling victory poses in your cell while the guards play cards next door.

It was good advice. However I felt that time and financial wiggle room was on my side.

Change of plan

The markets climbed. My portfolio was up 20% by the end of 2013. The rise continued as I made my first annual withdrawal early in 2014.

The sun kept shining. News bulletins proclaimed record stock market highs.

It was like watching a rich kid open yet another present: “What have you got me? Oh yeah, another record high is it? Thanks.” (Tosses away).

But I get nervous when things go too well.

And the stock market is a see-saw: As valuations soar, expected returns fall.

With expectations diminished by those record highs, it was time to rethink. Time to rebalance out of equities.

Time to take money off the table faster than a poker cheat in a Yakuza den.

By the time my 2015 withdrawal came along, my allocation to cash was already one year ahead of schedule.

There’d been a sharp, downward jolt September to October 2014. Call it a warning. I didn’t know what was going to happen next but salad days seemed less likely.

Equities marched on to new highs in May 2015. That was the last high they hit.

I pulled out another year’s cash in April.

My equities were now worth about one quarter of my mortgage.

Turmoil hit in June, August and September.

On my bike ride to work, I didn’t look at the rolling fields and trees. I kept playing my risk tolerance game

What if I lost half of everything from here?

A 50% loss would wipe out 12.5% of the mortgage fund. I could make that up in savings in less than a year. Rationally-speaking, there wasn’t a problem.

But there was.

I’d crossed an emotional Rubicon. I was taking risk I didn’t need to take. But it took the recent 15% losses to make me realise it.

What did the downside look like?

Painful.

What did the likely upside look like?

Meaningless. A few extra grand or so.

Investor know thyself

“I don’t understand why you’re doing it.”

The Investor’s words skewered me like a crossbow bolt, and not for the first time. We were spending another Sunday exploring the Goring Gap near Reading – the inspiration for Wind in the Willows – and hiking our cares away. Or, more accurately, earning credits for the inevitable post-hike nosh-up at a local pub.

Anyway, I mounted my defence. It was wafer thin.

Just as the hike excused our calorie splurge, so my explanations papered over my real position. That my risk tolerance had shriveled away now my original objective was achieved.

I was much less brave in the face of losses that I had no business taking.

I sold out the next week.

That was back in November. Six years early. The mortgage fund is now 100% in cash. No one can take that away from me now.

Not even myself.

It was one of the best decisions I’ve ever made. Like popping a pill marked ‘worry begone’. Now I’m back to gazing at the rolling fields and trees (/grizzling over some other aspect of life).

I got lucky. Large losses could have punched a hole in my assets and the wind from my gut. That would have been fine if my risk tolerance hadn’t changed once I’d mentally ticked the mortgage off as ‘done’, but it had.

Since then I’ve taken much bigger losses on my financial independence fund and not felt a thing. Because that’s risk I need to take and the day of reckoning is years away.

Hopefully this earlier skirmish is a lesson I’ll remember when the time comes to take that money off the table, too.

At the very least, I know myself much better than I did. The markets tend to force truth on a person.

Take it steady,

The Accumulator

The steep discounts touted by group buying sites like Groupon may not always be as spectacular as advertised, but I’m now able to take more holidays than ever before, in quality accommodation, thanks to selective use of their daily deals.

Ditching a lavish annual getaway in favour of more frequent, shorter holidays can help lighten a life of frugality in austerity Britain. Group buying offers are an excellent way of executing that strategy.

Group buying works

Let’s stake out our territory.

I’m not trying to stuff your inbox full of offers for collagen facemasks or stylish ottomans. My first recommendation is you unsubscribe from those product-led, group buying emails.

What about the wider concerns? Groupon’s public image, in particular, has been battered by bad press and a rap on the knuckles from the Office of Fair Trading.

Well, personally I’ve never had a bad experience with a group buying offer – and I’ve bought plenty of them.

It strikes me that group buying is like most other forms of retail. Things can go wrong, and it can be distressing for individuals when they do.

These businesses wouldn’t be growing so fast, however, if a large proportion of their customers were being badly treated.

As ever with the new, the media has a brief window in which to exploit general ignorance with a dose of attention-grabbing fear. That may at least partly explain the rash of horror stories.

Finding a deal

The first thing to do is to sign up for the email newsletters of a couple of group buying sites. Then adjust your free subscriptions so you only get the holiday daily deals.

My favourites are:

• Groupon Getaways

• Kgb Deals Destinations

(I still can’t quite get over a company that calls itself KGB Deals. It sounds like a false confession you might sign to avoid getting sent to the Gulag).

Once your subscriptions are sorted, you’ll get a daily dose of lovely breaks to daydream about before you start scything through another sprouting of work-related emails. (Those things grow like weeds!)

Group buying holiday deals dovetail perfectly with a frugal lifestyle because:

• Most are UK based.

• Many are two-night stays – tying in with short, frequent holiday strategies.

• Good hotel or inn accommodation is available for less than £50 a night.

• They offer a viable alternative to a camping mud bath.

Group buying holidays in practice

Mrs Accumulator and I had initially set a holiday accommodation budget of £50 a night. But once inflation kicked in, that target proved near-impossible to maintain without heading for the red lights or resorting to Travelodge blandness.

The likes of Groupon saved us from that fate. By twinning group buying deals with doing our due diligence via online reviews, we’ve visited some lovely places that would normally be way out of our price league.

I have no doubt that savvy holiday ferrets can root out equally good deals on their own, with enough research.

But group buying eliminates that faff by providing excellent suggestions without overwhelming you with choices. A little holiday moment also helps to take the edge off the daily grind every time your deals email comes through.

Just make sure you book your accommodation well in advance, and watch out for the expiry dates on your voucher.

The promise of living a little can be all you need to save a lot. With my escapist group buying holidays to look forward to, I firmly believe I can continue to fend off the occasional crisis of frugal faith.

Take it steady,

The Accumulator