The real skinny
We wrote about dividend investing a long time ago. We wrote a longer and more detailed article earlier this year. And still we got a question this week pointing out that I have never really gone into my own experience with dividend investing.
This post will redress this terrible wrong.
You can see a lot of what I am doing in the annual progress reports.
My wife and I have three separate portfolios. My main portfolio, which is in various index funds; my play portfolio, which is mainly dividend paying shares (and a couple of random purchases I regret); and my wife's portfolio, which is also in various index funds.
I believe investing in diversified, low-cost index funds is probably the best option for most people (including me). At the moment the easiest way to do that in Japan is to use mutual funds. This is not only likely to be more successful over time, it is also a lot less work than trying to be clever with a more active approach. This is why almost all of our money is invested this way.
However, I personally quite like the idea of dividend growth investing.
For me, there are several attractive aspects of this approach:
- being able to live off the dividends without having to touch the principal
- having dividends increase faster than inflation
- being able to see your 'income' grow in real time
- being able to ignore stock price moves
However, there are also drawbacks:
- you may underperform an 'all-market' index portfolio
- by buying single stocks you run the risk of large or total losses
- dividends may be cut or eliminated
- need to do research and follow companies
So how has it worked out for me? Well, I went through several phases.
Phase 1: the greedy phase
At the start I looked for and bought companies that paid a large dividend. This didn't work out too well as I wasn't looking at the full picture. One of the worst performers was Santander, which is currently down almost 50% and to add insult to injury also cut the dividend. An overly large dividend can be a sign of some kind of problem with the company.
Phase 2: the miserly phase
In this phase I looked for cheap Japanese companies that paid a large dividend but also had somewhat healthy finances (earnings per share larger than the dividend, etc.). This worked out extremely well, but only because I was lucky with the timing (the Bank of Japan pumped up the domestic stock market). We wrote about one of the success stories here. I figured the situation was going to change so decided to keep my gains and move on.
Phase 3: the balanced phase
Now I am looking for companies that pay a modest dividend, have healthy finances and a solid business, and seem likely to increase their dividends in the future. Things like Disney, Apple, Target, BP. Looking at my portfolio, I seem to have a lot of energy companies. I'll have to diversify a bit more.
So how have I done? Well, I think in terms of total value we have definitely lagged the index. I would be better off having bought world equity funds with the money instead.
However, it is nice to see the dividends mounting up. So far, I have received the following dividends (after tax):
2013: 44,304 yen
2014: 203,521 yen
2015: 211,193 yen
2016: 251,911 yen
2017: 297,229 yen
This year looks on track to be an increase too. At the moment I am just reinvesting the dividends, but if I stop working or reduce my income I have the option to spend the dividends instead. The main attraction is not having to think about selling in order to realise gains. Eventually I would like this to supplement my pension as a source of passive income.
And of course don't forget that most of our investments are in index funds. Still, the dividend portfolio is interesting and motivating, and I'm happy to carry on building it going forward.
How about you? Any experience with dividend stocks?