Question:
Based on your February 12th article, what's the point of recommending dividend growth stocks if you're just going to recommend selling them once they appreciate by 10%?
In the case of MATW, you're recommending it at a higher price than where you previously recommended selling it. If you just would've held on to it, your position would be worth more and you wouldn't have interrupted your dividend stream.
Answer:
Companies that have a history of dividend increases transmit far more than just the ability to compound income. The purpose of recommending Dividend Achievers is because we believe that companies with a continuous history of dividend increases proves that they are “quality” companies. What is left for us to determine is at what price are we going to acquire quality companies.
As aptly stated by the great Dow Theorist Richard Russell, “Let's say you are compounding your assets (reinvesting your dividends and interest) beautifully until a full-fledged primary bear market comes along (1973-74 and again in 2008). Within a year or two your assets are cut in half, and all your compounding has gone to waste.” (Dow Theory Letters. July 24, 2009. Daily Commentaries. Paragraph 3.) Richard Russell makes this commentary despite his most famous article on the concept of compounding titled “Rich Man, Poor Man: The Power of Compounding.” For this reason, the possibility of compounding a stock’s income is only a last resort if we happen to be wrong about the direction of the stock price after the purchase has been made. Again, we only want to be wrong with “quality” companies since holding on for the long-term is all the more easier with a steady growing dividend.
In the case of MATW, the yield on the stock leaves a lot to be desired in terms of compounding at just 0.90%. In addition, knowing that the historical annual return on stocks, adjusted for inflation, has not exceeded 10% in any 30-year period means that 10% or more in four months should be acknowledged as an exceptional return. Because we don’t ascribe to the mantra of diversification (see our article “Diversification: It Really Doesn’t Matter”), our investments tend to be concentrated enough to justify the transactional costs that we’d incur to get in and out of a stock.
On our website, we clearly point out that only stocks with a designation of “Investment Observation” are companies that we feel strongly about the prospects. The reiteration of Matthews Corp. (MATW) was for the purpose of alerting interested parties to put the company through their own research regiment as the price declines.
For our August 4, 2009 sell recommendation of MATW, we indicated that, “selling this stock now also generates a return 11 times greater than the amount of the dividend yield if the stock was held for a whole year.” We consider the fact that your return on investment should demonstrate the capacity to exceed what would be received if held for a full year. We also compare the performance of the stock against what would have been received if the same funds were held in 30-year Treasuries or guaranteed investment vehicles.
Although our approach is for the purpose of trading stocks, we don’t take the idea lightly. In the description of our site we state clearly, “this website is intended to give new insights on a low risk approach to trading in dividend paying stocks for tax deferred accounts with the ability to buy and sell individual stocks. This website is not intended for regular or non-qualifying accounts however, the strategies and stocks mentioned can be used for non-qualifying accounts with the understanding of the consequences of potential short-term capital gains as well as the need for exceptional documentation for IRS purposes.”
I hope this give a little more insight about our approach. Thanks again for a great question.
-Touc