Dividend Investing Vs. Value Investing

There is no topic that seems to draw as many internal contradictions as the discussion of money. This is true if you have a biblical worldview—you have to reconcile assertions that money is the root of evil with an imperative to leave an inheritance for your grandchildren’s grandchildren. You have Jesus Christ Himself telling you that it is easier for a camel to get through the eye of a needle than for a rich man to get in heaven, and then telling you the Parable of the Talents that rewards productivity and virtue over short-term thinking.

This is also true if you have a more secular worldview—how many parents have you heard say “money doesn’t matter—I only want my kids to be happy” –yet if they got to choose the person their sons and daughters married, which suitor do you think they would prefer between company vice president or aspiring beatnik poet? Why do you think that is?

And to narrow the conversation down even further to the terms that we usually discuss on this website, think about all of the conflicting advice we get from Benjamin Graham and his star apostle, Warren Buffett. In Graham’s vocabulary, it would be nuts to buy and hold for decades and decades. You buy something cheap, wait for it to be priced at what it is worth, and then you sell it. Wash. Rinse. And repeat.

And yet, Warren Buffett is sitting on those same shares of Coca-Cola that he bought in the late 1980s and early 1990s, turning a $1.3 billion investment into something worth $15 billion today—and that does not even factor in the two decades worth of dividends that Coca-Cola has deployed to Omaha headquarters, giving Warren Buffett a relentless infusion of cash profits to make brand new investments that can, you guessed it, make cash profits.

When your mind starts thinking about this stuff, it’s natural to wonder—do I buy something and watch it grow until I die, or do I buy something with the predetermined intention to sell at a particular point?

Here’s how I break down the classifications.

I put every company I categorize into two categories:

(1)    Companies that are highly likely to be profitable 25, 30, 35 years from now. For me, that means companies like Coca-Cola, Disney, Kraft, Hershey, PepsiCo, Johnson & Johnson, Procter & Gamble, and some others.

(2)    Companies that are profitable now, but I have no ability to make predictions about their profits 20+ years from now. I own IBM, but I have no idea what it will look like in 2035. I’ll probably own Wal-Mart and Walgreen at some point, but I wouldn’t delude myself into thinking that I could hold those companies for decades without thinking much about them, because that is not the nature of retail investing.

Once you properly categorize the companies that you are considering purchasing, it is a lot easier to develop a sensible sale strategy.

For companies in the first category, the time to sell is “never” or “nearly never” to allow for wild things like Coca-Cola selling at 50x earnings or something crazy like that, in which case, the opportunity cost of not selling becomes so high that you would be wise to unload your shares. If someone wants to give me $230 for Johnson & Johnson stock, fine—take it. The hassle of finding something new is worth selling because the price would be exorbitantly higher than true value.

However, once you enter the category of those second-tier companies, it can make a lot of sense to sell at signs of fair value or slight overvaluation. If I owned Walgreens and it went up to $75 next week, and I held the shares within a tax-protected account, I would not hesitate to sell the stock because it lacks the high likelihood that it will be more profitable 25+ years from now, so I would be more agreeable to selling the company in response to mild overvaluation.

The logic is that when you invest money, you need to have a purpose for that money.

When I buy Johnson & Johnson or Procter & Gamble, the general point is to be receiving somewhere around $3.00 in immediate income on every $100 that I invest, and I want those $3.00 cash deposits to grow by 7-10% every year thereafter (this is easily doable if you can reinvest along the way). It’s hard to find assets that will give you more and more money until you die, but those kinds of companies are probably some of the best places where you can start.

Other investments do not share the same purpose of constant dividend growth, but are sought after because they are cheap. That’s my personal story with Bank of America. If I wanted to hold something for thirty years, I’d be looking to US Bancorp, Wells Fargo, or JP Morgan. But Bank of America was cheap at $7-$8, so I bought it. If I went up to $25 per share by the end of the year, I’d have no problem selling it because the purpose was more in line with medium term wealth-building (rather than being like Phil Fisher’s Motorola investment that got bought in the 1950s and held until death).

There is no right or wrong answer per se; you may think that Wal-Mart is a stock you can hold until 2040, I might think it’s something that requires regular monitoring. Not a big deal. But the key is to think terms of the companies you own whose purpose is primary to give you bigger and bigger cash deposits each year that act as wealth anchors, and to differentiate them from  companies that you buy simply because they are solid and selling for less than the price you think its worth. Know what kind of investments you prefer, and then tie the purpose of your general investing strategy into your thought process at the time you buy a stock. If you buy without an end game to sell, the answer is clear—you only get rid of the stock if the company’s profit engine is falling apart or if it is selling for something absurd like 50x earnings. If you don’t want to attach such permanence to an investment, then you wash your hands of the stock once the stock price surpasses what you think it is worth.


Originally posted 2013-12-02 08:12:44.

Like this general content? Join The Conservative Income Investor on Patreon for discussion of specific stocks!

11 thoughts on “Dividend Investing Vs. Value Investing

  1. Matt says:


    This is a little off topic, and i hate to be that guy who nit picks, but the Bible says that the LOVE of money is the root of all evil…not money itself.

    Anyway, good read!



    1. Tom says:

      Matt, that is not nit-picking, that is actually the crux of the matter. The LOVE of money is the root of all evil, not the money itself.

      In today's vernacular, if you want to know why something happens in politics it's "follow the money". In sports it's "all about the Benjamins". So yeah, I can see that the love of (aka obsession with) money really is the root of all problems.

      That's why I like Tim's articles. I get the sense that he does not "love" money. That is, money is a tool to him, a means to an end, not an end itself. I have no idea about Tim's religious views, but frugality, patience, and wisdom; those are Biblical principals worth practicing regardless of your philosophical beliefs.

      Tom in Ohio

  2. says:

    Tim, once again you put your finger on the pulse of a question every investor wrestles with, and handled it with sound reasoning. Thanks for the great insights.


    Charlotte, NC

  3. Toyin says:

    Tim, I'm your long time fan. I'm really blessed by your articles both here and SA. Are you really serious you want to be a lawyer. Your gifts to mankind would be better appreciated in the financial world. Think about it.

  4. lifeincenter says:

    Nice post!

    I could go for value investing but I think that would require too much attention from me to be constantly aware of how the stock market moves. That's why I like dividend investing more, slow and steady and a truly set and forget(almost).

  5. Waterbuffalo says:

    I know the Bible says the LOVE of money, but I personally believe that it is the NEED for money that causes much of the evil… If you were to leave your car running with $1,000 in the passenger seat and walk away from it, then I were to walk by, I wouldn't take the car or the cash. I don't need it. But if my children were starving however, that would be a different story.

  6. says:

    I feel I'm both a value and dividend investor. I'm more of a value investor on the buy side preferring to buy stocks when trading at low valuations. I then prefer to hold forever if possible. However, I monitor every company I own (even the KO's and JNJ's) for reason to sell. If the companies ever become grossly overvalued or I believe future prospects begin to look dramatically worse then I will go ahead and sell. So far, I've had very few reasons to sell any of my holdings. But I know as my career progresses through the years I'll have many occasions where I was forced to make an ownership decision.

  7. says:

    Hi Tim,

    Thanks for another great article! I follow a very similar philosophy. The question of "which company will be profitable 20 years from now" is a tough one; not as simple as some DG investors would have you believe. Past performance and all….. In fact, most of the companies in the "core" category one are well past their growth phase. They have already experienced all the benefits of a maturing company plus all the macro benefits of the last 50+ years including abundant cheap energy, world peace (mostly – no world wars anyways), economic globalization, the population boom, technology advances, and favorable corporate policies from Washington. It's safe to say that these mature companies will only continue to grow through acquisitions (which can be hit or miss) and/or continued emerging market penetration. Many of the core DGi stocks companies have experienced either declining revenues or low earning over over the past several years. Even worse, this is coming at a time when cash is cheap and may of these firms are using share buyback programs to "artificially" boost their EPS.

    2013 Earnings y/o increase from 2012 (Q4 estimated for some)

    PG 3%

    JNJ 5%

    KO 1%

    KRFT -7%

    PEP 4%

    Why is this important? Valuation. You do not want to over-pay for slow growth companies. Getting into these companies at the right price will make a huge difference in your total return – even over the long run: I believe many of the current dividend aristocrats will continue to experience low growth. I consider them defensive stocks similar to a bond alternative or a utility. I believe you can expect lower total returns than these companies have provided over the last 30 years. Again I believe you must initiate positions in these companies at the right time (and now does not seem like a good time to buy them).

    I do not find it coincidental that many dividend bloggers, who have a product to sell, show public portfolios that they started in 2010. I am sorry but a monkey with a dart board of ticker symbols could have done well with DGI starting a portfolio in 2010. Tim – you are not one of these – I love your work and you have never tried to sell me anything! 🙂 Choosing these stocks now is the same as buying them in 2010 nor will it produce the same returns IMO.

    I have recently been moving from mutual funds to a 70% DGI portfolio (30% growth) and it has been difficult to find DG stocks at a decent value. I do not think it's a good time to simply build a portfolio of aristocrats; they are pricy for low growth companies and I think they will get hit just as hard as everything else in the next major correction (thus losing their defensive quality).

    My strategy has been to buy a few of these "core" dividend companies and start 'dripping' them (I chose KO/PG/JNJ/PM/WMT/MCD) but at very small % of my portfolio (1 – 2% each). The rest of my portfolio is composed of dividend companies that are undervalued or are companies still in growth mode. In this category I have purchased XOM/AGU/GE/WFC/AAPL/BAX/AIG/HP and then mixed in a few yield boosters such as PSEC/EPD/DLR/O/T and some growth stocks such as YHOO/CLNE/DDD. I think other good choice for new positions are AFL/DE/TGH/DNKN

    So that has been my strategy entering the game after 4 years of bull market in which DGI has been the trendy strategy of the times. Sorry for the long comment. I welcome your feedback on my strategy. I simply wanted to say I agree with you but it has been tough to build the "core" section of the portfolio as a new investor in late 2013. I hope my comments help others new to the DGI strategy. Hopefully many of my picks are the Aristocrats of tomorrow! 🙂

  8. Glenn Schwartz says:

    WOW! It really makes sense. It’s almost as detailed and informative as the articles of my favorite compacom.com website. Now, I’ll read this author too. Maybe, I’ll find more details on any financial matters in addition to Compacom analysts.

Leave a Reply