The Ultimate Dividend Playbook E-Book

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 551

Veröffentlichungsjahr: 2011

Beschreibung

Many people believe that the key to success in the stock market is buying low and selling high. But how many investors have the time, talent, and luck to earn consistent returns this way? In The Ultimate Dividend Playbook: Income, Insight, and Independence for Today's Investor, Josh Peters, editor of the monthly Morningstar DividendInvestor newsletter, shows you why you don't have to try to beat the market and how you can use dividends to capture the income and growth you seek.

Leseprobe

Table of Contents

Title Page

Copyright Page

Acknowledgments

Introduction

What Are Dividends, Anyway?

A Role Model

The Ultimate Dividend Playbook

Chapter 1 - Income? From Stocks?

Portfolios: Piles and Flows

Living Off the Pile

Meet Mr. Market

Sally and Mr. Market

Are Fixed-Income Investments the Solution?

The Third Way: Income from Stocks

Where the Dividends Are

The Ultimate Example

What Do You Want to Own?

The Bottom Line

Chapter 2 - Dividends, Values, and Returns

Begin with the Humble IOU

Total Return on an IOU

From 10Us to Stocks

The Honor System

A Rising Dividend Stream

The Grand Conclusion

Dividend Yield and Dividend Growth

Dividend Returns and Realized Returns

The Bottom Line

Chapter 3 - Corporations: Dividend Machines

Capital and Profits

Evaluating Profitability: Not All Profits Are Created Equal

Long-Term ROEs: Competition Counts

Economic Moats

Evaluating Moats

The Jump from Profits to Dividends

Sustainable Growth, Meet Achievable Growth

Returning Cash to Shareholders? Which Ones?

The Bottom Line

Chapter 4 - Dividend Insight

The Uses of Dividends

Sticky Dividends

The Virtues of Dividends

Virtues and Profits

A Tale of Two Seat Makers

Dividend Records: The Trend Is Your Friend

Introducing the Dividend Drill

The Bottom Line

Chapter 5 - Dividends Past, Present, and Projected

The Difference between 7 Percent and 11 Percent

A Brief History of Dividend Yield

A Brief History of Dividend Growth

Inflation

Dividend Payout Ratios

Of Profits and Profitability

The Bottom Line

Chapter 6 - Is It Safe?

Earnings: The Capacity to Pay

Payout Ratios: The Sufficiency to Pay

Earnings Stability

Earnings Durability

The Willingness to Pay

Warning Signs

The Bottom Line

Chapter 7 - Will It Grow?

The Dividend Record

Introducing the DDRM

How the DDRM Works

The DDRM Applied

Capital Consumers and the DDRM

Premises of and Limitations to the DDRM

Means versus Motive

The Bottom Line

Chapter 8 - What’s the Return?

The Standard Approach to Risk

The Dividend Approach to Risk

Margins of Safety

Requiring an Adequate Return

Hurdle Rates in Action

Valuing a Stock with the DDRM

Final Reality Check: Yield History

Stuffing the “Too Tough” File

What’s Your Return?

Chapter 9 - Independence

The Wall Street Way

Stepping toward Independence

Dividends: The Ultimate Psychological Advantage

Independence in Action

The Bottom Line

Chapter 10 - Managing a Dividend Portfolio

Question 1: Target Yield

Question 2: Tax Status

Building Your Opportunity Set

Diversification

What about Risk?

Tracking Your Progress

Monitoring Existing Holdings

When to Sell, When to Swap

The Bottom Line

Chapter 11 - The Future of Dividends"

Dividend Taxes: No Fair!

Dividend Battleground: Shareholders versus Management

Shareholders Who Should Know Better

Solutions for the Tax Bias

Solutions for Corporate Conflicts

What It Is, Rather than What I’d Like It to Be

Epilogue

Appendix 1 - The Nuts and Bolts of Dividend Payments

Appendix 2 - Dividends and Taxes

Appendix 3 - Banks

Appendix 4 - Utilities

Appendix 5 - Real Estate Investment Trusts

Appendix 6 - Energy Partnerships

Appendix 7 - Other Dividend Opportunities

Index

Copyright © 2008 by Morningstar, Inc. All rights reserved

Published by John Wiley & Sons, Inc., Hoboken, New Jersey

Published simultaneously in Canada

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ISBN-13 978-0-470-12512-0

Library of Congress Cataloging-in-Publication Data:

Peters, Josh.

The ultimate dividend playbook : income, insight, and independence for today’s investor / Josh Peters. p. cm.

Includes index.

1. Dividends. 2. Stocks 3. Investments. I. Title.

HG4028.D5P48 2008

332.63’22-dc22

2007038108

Acknowledgments

THE TWO INDIVIDUALS most directly responsible for bringing my ideas to life, both in this book as well as in the monthly issues of DividendInvestor, are Morningstar designer Christopher Cantore and editor Sylvia Hauser. These fine professionals both worked long hours on short deadlines without sacrificing the humor, creativity, and keen eyes for detail I’ve come to rely on over the past three years. I can’t thank either of them enough.

My content was improved mightily by the feedback of Pat Dorsey, Morningstar’s director of equity analysis, and Haywood Kelly, chief of security analysis. Maureen Dahlen, Courtney Dobrow, and Paul Justice, along with many other folks I’ve worked with at Morningstar and John Wiley & Sons, helped speed the writing and editing process to its blessed conclusion. And since seeds without soil might just as well be stones, I have to add my thanks to Morningstar founder Joe Mansueto and individual investor segment president Catherine Odelbo. Along with Pat and Haywood, they’ve provided the patient, inquisitive environment in which I could develop the strategies I’m now able to pass along to you.

There’s basically no chance I would even be interested in stocks if it wasn’t for the early encouragement of my parents, Henry and Susan Peters. I’m sure they were puzzled by a 13-year-old’s desire to hang out at brokerage offices rather than at hockey rinks, but they ensured I was able to learn everything I could. And my primary teacher, in so many things in addition to the stock market, was and still is Glen Bayless. He took that kid with a $200 account under his wing when there was nothing (except possibly a bit of amusement) in the deal for him. I can never repay the debt I owe my mother, father, and “big brother” Glen; I can only hope to serve others as generously as I have been helped in life.

The biggest thanks of all go to my wife, Jaime, for the marvelous grace, wisdom, and beauty with which she has immeasurably enriched my life. It is to her that I dedicate this book.

Introduction

YOU MAY HAVE heard that the basic idea of the stock market is to buy low and sell high. Pardon me for saying so, but that sounds like a lot of work. An investment represents money that is supposed to work for me, right? Having earned my money once already, why should I have to work for it all over again?

When it comes to redundant and wasted effort, nothing tops the stock market. I came to the conclusion long ago that investors, professional and individual alike, work much harder than necessary. As J. P. Morgan once promised, stock prices will fluctuate—everyone knows that. Even blue-chip businesses can see their market values swing 50 percent or more over the course of a single year. These ups and downs seem to promise great wealth, if only the investor can time the buys at low points and the sales at high ones.

The trouble with this mentality—in addition to poor odds of consistent success, of course—is that it puts almost 100 percent of the responsibility for profits on the back of the stockholder rather than the stock. It’s as though the stock market is not about business at all, but rather a grand game pitting wily investors against each other in attempts to beat the market.

Yet the fact remains that stocks are capable of providing attractive returns to their owners. Treated as partnership stakes in profit-seeking businesses, stocks are highly useful tools—tools for storing value, tools for generating income and accumulating wealth, tools effective enough to meet a lifetime’s worth of financial goals. But if we are to shed the game mentality of our fellow investors, our stocks must provide an alternative source of reward. Rewards with no additional effort. Rewards not subject to the whims of Wall Street. Above all, rewards paid in cash.

Those rewards are cash dividends. This book is not only about how dividends work, but about how dividends can work for you.

I should state up front that The Ultimate Dividend Playbook is about as far from a get-rich-quick guide as you’re likely to find. In Morningstar DividendInvestor, I once wrote that subscribers shouldn’t expect the 1,000 percent returns other newsletters promise, at least unless they were willing and prepared to follow my advice for the next 25 years. But that’s the point: A 10 percent annual return, well within the reach of a simple, low-maintenance dividend strategy, turns $100,000 into $1.1 million over a quarter of a century. As of this writing, it’s also possible to generate income from a portfolio of dividend-paying stocks equal to 6 percent or 7 percent of its initial value without any need to trade. Best of all, this income can and should grow faster than the cost of living. In a world where we’re lucky to find bonds and CDs paying even 5 percent, and these options providing no respite from the threat of inflation, I hope these observations will come as welcome news.

Rather than promise sky-high returns—which would probably sell a lot more copies of this book—only to deliver the mud beneath my boots, this book sticks to three core principles:

1. Income. At the bottom of it all, it is income, not capital gains, that most investors need to meet their financial goals. Fortunately, many conservative, well-managed, and economically attractive businesses are prepared to provide good income through dividends.

2. Insight. Dividends are worth much more than the sum of income they generate. No matter how routine on the surface, each dividend is a critical signal of the financial health, growth, and value of a business.

3. Independence. The taste for gambling and speculation is not equally distributed through the population—and thank heaven for that! I strongly suspect that most investors would just as soon not live their lives entangled with Wall Street’s never-ending pageant of fear and greed. Dividends, by contrast, set the investor free from fickle market prices and unreliable capital gains.

What Are Dividends, Anyway?

Glad you asked! Strictly speaking, a dividend is a transfer of assets (almost always cash) from a corporation to its shareholders.

A share of stock—any stock—represents a bit of partial ownership in a business. A successful business typically has a good deal of assets (even after deducting its debts), and management employs these assets to turn profits.

Yet a corporation is an entity separate from its shareholders. You might look at a corporation as a lockbox containing all the assets and earnings of the business. As a shareholder, you own part of that lockbox, but you don’t have direct access to its contents. The key to the lock is held by the corporation’s management. Only when they decide to unlock the box and hand part or all of the cash inside to shareholders do those shareholders—the ultimate owners of the box—get to benefit directly from what is held inside.

Not all corporations, even those with enormous profits and sizable cash reserves, are willing to unlock the box for shareholders’ benefit, preferring instead to keep control of the cash for themselves. But many corporations do. Some pay out only a little, while others—the kinds of stocks we’re interested in—pay out a lot.

Furthermore, corporations that have paid dividends in the past have a very strong tendency to continue dishing out cash in the future. The box is opened and cash disbursed on a predictable basis, and over time, these payouts tend to grow larger and larger. From the investor’s perspective, the value of a share of the box isn’t about the box itself, but rather the growing stream of cash it will provide in the years and decades to come.

To consider just one example out of hundreds, let’s look at the shareholder experience at Associated Banc-Corp (ASBC) over the past 20 years. At the end of 1986, shares of Associated sold for $4.08 apiece (adjusted for subsequent stock splits, as are all similar references in this book). Back then, Associated’s dividend rate—the amount of cash paid on each share annually—was running at just 10.6 cents a share. Dividing the 10.6 cents in annual dividends by the stock price of $4.08, we can say the stock provided a dividend yield of just 2.6 percent. The investor looking for income probably could have walked into one of Associated’s bank branches and received a much higher rate of interest.

Figure I.1 Associated Banc-Corp (ASBC): Cumulative Dividend Income

Dividend yields may look like interest rates, although neither the dividend nor the stock that is paying it has a fixed, guaranteed value. But unlike the interest paid on a bond or a CD, Associated’s dividend payments rose every single year thereafter. (See Figure I.1.) Despite the initial yield of just 2.6 percent, just look how those dividends accumulated!

By 1999, Associated had paid out cash dividends equal to the purchase price of the stock 13 years earlier. Seven years later, by the end of 2006, those cumulative dividends were 2.5 times the 1986 stock price. In 2006 alone, payments totaling $1.14 a share were equal to 28 percent of the 1986 purchase price. And even this was not the end: Associated raised its dividend yet again in early 2007. If history is any indication (and in this case, I believe it is), many more decades of steadily rising payments lie ahead.

But before you focus too closely on this ascending pile of accumulated dividends—attractive though it is—step back to visualize the peace of mind this kind of performance inspires. Between 1986 and 2006, a period containing some of the great bull runs of all time, I count three major bear markets, a number of smaller corrections, and four major stretches of rising stock prices. Yet for the truly patient holder of the stock through this whole period, these fluctuations mattered not one bit. I can’t go so far as to say that a dividend strategy is maintenance-free—one needs to be aware of factors that could slow dividend growth or even lead to reduced or eliminated payments—but it’s hard to imagine a better way to have your money working for you, rather than the other way around!

Figure I.2 Associated Banc-Corp (ASBC): Share Price and Dividend History

And not only did Associated’s rising dividend provide more and more income as the years rolled by, but each dividend increase made the stock more desirable to own. Those dividends drove the market price of the stock higher in tandem, as shown in Figure I.2.

You may look at this chart and conclude that Associated’s stock price alone might seem to have been a pretty nice investment; who needs dividends? But let’s now invoke the concept of total return: capital gains and dividends working together to provide profits and build wealth. Associated’s stock price rose an average of 11.3 percent annually over this 20-year stretch. Without dividends, that would have turned a $10,000 investment into roughly $85,000. But with dividends—specifically, dividends reinvested into additional shares along the way—that same $10,000 investment compounds into a stake worth $161,000, nearly twice as much as from capital gains alone. The total return on the stock over these two decades was not just the 11.3 percent average annual capital gain, and not just the 3.2 percent average yield, but an average total return of 14.9 percent annually.

I chose Associated not because it is a spectacular example of success, though in its own way it certainly has been. Instead, Associated is noteworthy precisely because it is so ordinary. This bank may not be well known across the country, but it certainly is to hundreds of thousands of depositors and loan customers in Wisconsin. Dozens of seemingly humdrum banks in other corners of the country have generated similar performances, as have hundreds of firms in other industries. The unifying factors are growing dividends and the patience to collect them.

A Role Model

Dividend investors have few heroes, at least as far as you can discover by browsing the bookshelves at Barnes & Noble or reviewing a year’s worth of cover stories in Fortune or BusinessWeek. Indeed, dividends may be the most misunderstood aspect of investing in stocks, to the extent people bother to understand dividends at all. Most professionals are indifferent to dividends, and a surprisingly large minority are downright hostile. Even the fans of dividends you might see on TV or read about in a magazine are usually on their way somewhere else, collecting dividends just to kill time while waiting for other opportunities to crop up. True fans, those who understand the critical role of dividends over the long run, are very rare in the professional ranks.

As editor of a monthly newsletter devoted to the topic, Morningstar DividendInvestor, I am one of those rare professionals. And while I admire Warren Buffett, Peter Lynch, Marty Whitman, and many other famously successful and articulate investors as much as anyone, my true hero is—drum roll, please—Marjorie Bradt.

Don’t spend too much time trying to place her name; she’s never been featured on CNBC or mentioned in the Wall Street Journal. She’s never written a book about investing or managed a mutual fund. Indeed, the stock market has never even been a hobby of hers. Yet I’m willing to bet that Marjorie’s long-term investment record beats the vast majority of investors over the past half century.

I became familiar with Marjorie’s remarkable record while working as an assistant to a stockbroker in 1999. Marjorie and her husband, Don, were getting their ample estate in order, and they needed cost basis information for their seven-figure portfolio. Given this task, I was handed a folder six inches thick with old statements, some dating back to the 1950s. The best information I had was their current portfolio, almost all of which consisted of the various corporate descendants of AT&T, the original Ma Bell.

Working backward from what they owned in 1999, I noticed that Marjorie’s account was marked by a distinct lack of active management. All she did, it seemed, was reinvest her dividends—quarter after quarter, year after year, decade after decade. When AT&T broke up into a long distance-only carrier and the seven baby Bells, Marjorie held on to all eight stocks. When Southwestern Bell bought Pacific Telesis and Ameritech, she held on. When AT&T went on to spin out Lucent, and US West spun out MediaOne, she held on to those, too.

After more than a day’s worth of work, I finally found the root of Marjorie’s wealth: a handful of gifts of AT&T stock given to her by her father between 1955 and 1962. Their original value totaled $6,626. Very early on, she signed up for AT&T’s dividend reinvestment plan. Instead of getting penny-ante dividend checks every three months, she turned those payments into additional shares, which led to more dividends, and so on. As AT&T prospered and raised its dividend rate, the value of each share rose as well—as did the Baby Bells’ dividends and share prices. By 1999, this investment had blossomed into a portfolio of ten separate stocks worth more than $1 million—all of them descendents of the original Ma Bell.

I was astounded. Here was all this wealth, but Marjorie hadn’t lifted a finger to earn it. She hadn’t foreseen the raging inflation of the 1970s, the surge in gold, the run of small caps, then large caps, then small caps again. She didn’t predict anything—and she didn’t have to. She just held and held, reinvesting every dividend, letting these rising dividend payments do all of the work.

The beauty of Marjorie’s experience is its simplicity: Anyone could have done the same, even if virtually no other investors did. No PhD, MBA, or CFA was required; math skills learned in junior high school could suffice. Marjorie didn’t have to trouble herself with a market-timing strategy or the pursuit of the next Microsoft. And it isn’t as though AT&T was a diamond in the rough in the 1950s; back then the company owned almost every telephone in America. Other companies were growing faster, but millions of investors held stock in Ma Bell, drawn in by the same thing that made AT&T attractive to Marjorie’s parents: large, steady, and growing dividends. Marjorie thus traded the usual investor attempts at prescience for a combination of dividends and patience—and rarely does one find an example of such a richly rewarding investment strategy.

The Ultimate Dividend Playbook

This book is devoted to putting the three dividend plays of income, insight, and independence into practice. These are the tactics I’ve used to make investment recommendations in Morningstar DividendInvestor, and in the aggregate, these stocks are providing exactly the kind of income and income growth I’ve set out to earn. Prices rise and prices fall; dividend growth may exceed my expectations or disappoint. But the well-rounded model portfolios I manage are delivering the cash to meet real-world investor needs.

As this book unfolds, I’ll take you through the insides of a corporation and the factors that allow it to pay and raise dividends; I’ll show you how to separate safe dividends from risky ones, and how to construct a portfolio of dividend-paying stocks to meet your financial needs. Along the way I hope to share a little business acumen and a lot about dividends, and to frame an approach—emotional as much as intellectual or financial—that will equip you for a rewarding investing career.

1

Income? From Stocks?

CONGRATULATIONS ARE IN order! If you’ve picked up this book, you probably have some money to invest. Perhaps you’ve just retired with a couple of hundred thousand dollars, maybe even a million or two. Funny thing about money, though: It doesn’t come with instructions. Television commercials for the Wall Street Journal in the 1980s used this line to suggest that the Journal was the next best thing. I appreciate the Journal’s insightful missives as much as anyone. For the most part, though, you and your money are largely on your own.

Whether your accumulated savings are large or small, we can begin by asking what you want from the money. “To get rich” is a straightforward and honest answer, but it may not quite get to the heart of the matter. Fortunes have been and will be made by investors who can outguess the market, especially with large quantities of other people’s money. It’s also true that very few of us will reach the ranks of the superrich. Even on Wall Street, there’s only so much dough to go around.

Then again, it’s not necessary for one’s investments to generate fantastic fortunes. Buying groceries, paying the gas bill, taking a vacation now and again—these are the bread-and-butter activities of Main Street, both before retirement and after. The goal of saving and investing, then, is to replace the paychecks earned by the sweat of your brow with paychecks from your investment portfolio. Income—steady, reliable, predictable, and rising income—is the objective.

Portfolios: Piles and Flows

There was a time, a generation ago or thereabouts, when the average working stiff didn’t have to think too hard about retirement. We were thriftier back then, with a lot fewer financial choices. Savings went into passbook accounts that paid 5 percent interest. Paying off the mortgage was a well-earned cause for celebration. The boss took care of retirement income, through defined-benefit pension plans. And whatever the pension couldn’t cover, Social Security and a modest accumulation of savings would.

Though held in derision and contempt today, defined-benefit pensions plan were reasonably well suited to the needs of the average worker and retiree of the time. Only a tiny proportion of the American public is trained in investment analysis and portfolio management. We all memorized the state capitals and learned how to dissect frogs, but they didn’t teach much (if anything) about personal finance in school. Having employers and their investment managers take responsibility for investment decisions made a lot of sense. Leaving asset-allocation and security-selection decisions to the professionals allowed ordinary folks to concentrate on their jobs and personal lives.