The Best Dividend Investing Tip

One of the statistics that I often think about, and have mentioned with some frequency on this site, is the fact that the average equity investor compounded his wealth at 3.49% annually from 1990 through 2010 while the S&P 500 Index posted annual returns of 7.81% during that time frame.

To check out the study yourself, click here:

When I pursue investing, my long-term assumption is that I will achieve returns somewhere between 8-12% annually (assuming 3.5% annual inflation). If everything goes right, and companies like Coca-Cola, Johnson & Johnson, and Procter & Gamble are able to replicate their former glories (in terms of earnings per share growth) due to a combination of population growth, share buybacks, and price increases/productivity increases, then I imagine that figure will lean closer to 12%. If I make some big mistakes along the way like buy a decaying tech stock or a bank that experiences a blowup (think Wachovia, Washington Mutual, Lehman Brothers, etc.), then that figure may be closer to 8% over the course of my lifetime. My job is to make sure that I can still get to where I need to be even if I “only” hit that 8% annual rate over the course of my lifetime.

But implicit in that is the fact that I don’t want to be one of those people that achieved 3.49% returns while the market at large returned 7.81% over a long stretch of time. The best thing I have to say for avoiding that trap is this: Focus your energy on your future investments rather than modifying your current investments (this notion is much less applicable to investors currently in retirement).

When I bought Royal Dutch Shell right after the weak earnings report, I was pretty much done thinking about it. It might consume—maybe—fifteen hours worth of examination over the next year or two. If I am doing my job right, I am picking companies with nearly unassailable moats that will be generating more profits five years from now than today, and will be generating more profits in 2023 than in 2018. In other words, once I make a selection, I let the company’s business performance do its thing. I don’t want to spend my time rearranging and reshuffling assets—I don’t want to go through life trying to eke out a small gain here and there. Rather, I want to generate surplus capital from labor, acquire an ownership stake in a business, and receive a growing share of the profits (dividends) as the business increases its earnings per share over time.

This means that once an investment is made, my focus shifts to finding a new investment opportunity and finding a way to make some money to acquire an ownership stake in that company. Meanwhile, the stocks I bought recently and in yesteryears compound silently in the background (some of the dividends are pooled together as cash, others are directly reinvested back into the paying company because my attitude towards something like Johnson & Johnson is that I want to own more, more, more of it over the course of my lifetime). The point is this—once I buy a business, I let the company do its thing and shower me with dividends over the course of my life. Yeah, I’ll check it here and there to make sure that it’s not about to fall apart, but that’s not where the bulk of my energy goes from. From there, I’m focusing I’m buying something new to add to the collection.

If you look at buy-and-hold baseball collectors, they pick up a Ty Cobb autographed baseball here, a Stan Musial signed bat there. Over the course of a lifetime, they’ll have a portfolio ofblue-chippers—a Mickey Mantle signed photo, a Joe DiMaggio signed bat, a Willie Mays signed jersey, and so on. It’s all about the constant addition of high-quality goods. That is how I view investing. It’s not about selling and reshuffling what I already have. It’s about building a collection. Some Coca-Cola here. Some Procter & Gamble there. Some Exxon over there. Some Colgate-Palmolive right here. I don’t want to get in and out of stocks. I want to build a financial fortress. That means I’m always focused on what to add next, not what to rearrange among what I already own.

Originally posted 2013-08-15 23:56:35.

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15 thoughts on “The Best Dividend Investing Tip

  1. seyoung says:

    Since I have found out DGI from SA site on the beginning of this year, you were one of my favorite author.

    I think I was very lucky to find your site and to learn from your numerous useful articles. Actually I was thinking the same thing today–don't look back, just keep accumulating the quality stocks as many as you can–and you expressed my vague feelings in the writing so beautifully.

    I really appreciate your writings and it is such a pleasure to read your fluent articles and learn from them and also sometimes reassure my investment goal.

  2. Ryan says:


    I already have about 25 companies in my portfolio and dont want it to grow any larger so I dont really feel like this applies to me. I basically just monitor my companies to see if they become undervalued so I can add more shares. Do you think I should be open to adding more companies or is my approach ok? The reason for only having 25.. I dont feel like I can follow/keep up with more companies than that.

  3. Pursuing Financial F says:


    I am an avid reader and thank you for your insight. A question I have, as a new DG investor, concerns concentration of funds. I have found the number of what I consider undervalued equities to be low. Therefore, I feel like my diversification has not been where I would like it. I believe in buying value and not just a stock price. Needless to say, I have not yet purchased JNJ, PG,KO,etc. I have been purchasing the likes of XOM,CVX,AF. In your opinion, is this acceptable or would a better strategy be to initiate small positions in what I will consider "pillar" stocks in the long term and DCA up or down accordingly? Again, thank you for your insight and I appreciate your response. Keep up the good work!

  4. Hope you guys don't mind if I add my two cents here. @Ryan, 25-30 individual stocks is pretty much an ideal portfolio if it is properly diversified (2-3 companies across 10 sectors). Any more than that and you wont see much of a benefit. A 3-5% weighting is a great rule of thumb. @PursuingFinancialFreedom, finding undervalued companies that you plan to hold for life is a great, great thing. However, some companies that you should have exposure to may never be undervalued (KO is notorious for that). For DGI investing; undervalued is ideal, fair valued is perfectly fine, overvalued is off limits. Goodluck.

    1. Ryan says:

      I don't mind at all, I appreciate the reply. Unfortunately I don't have very equal weighting among my holdings since I just started the portfolio last year. I kind of did what PFF is talking about and bought small amounts of all the companies I wanted to own(some were slightly overvalued like KO) and have been adding large chunks to the ones I feel are undervalued. Needless to say, that has made my portfolio kind of lopsided but I figure I have 15 years to balance it since that's when I plan on starting to draw from it.

  5. @Ryan, nothing wrong with that at all. I did something similar. Having a good balance can get tricky because you want to be diversified enough to protect yourself from systemic risk (a collapse in an industry or sector) but you also dont want to buy overvalued securities just to bring your weighting back into alignment. There will always be trade-offs but the important thing is to have a diversified portfolio filled with quality stocks that you purchased at either under or fair valuation.

  6. Pursuing Financial F says:

    Thanks for the reply @BidAskDividends

    I understand what you mean as perpetually at or overvalued. I use many tools like FAST graphs to help with my due diligence. I want to initiate a position in KO, but not at $39 and JNJ, but not at $89. I'm looking closer to $37 and $85. With that being said, part of my question was aimed at deciding whether I should jump in above my ideal entry points and DCA up or down for these "pillar DG stocks" or continue to purchase the stocks I have identified as a great value but cause me to lack diversification? I'm probably over thinking everything, but I like to have a clear understanding of my goals before I proceed. Either way I feel in the end I will be very happy with the results. As Tim mentioned, I am not worried about my previous buys, but focused on my next purchases.

  7. Waterbuffalo says:

    That's a hell of a good tip. In fact, it is actually 2 tips in one: Unless you want to be worried about today's purchase next year, buy quality now. Then you won't be worried about it later – and you wont be worried about trying to adjust it later. Then you can focus on today's purchases, not yesterdays.

  8. @PFF, it is great to have a decided-upon entry point. Is it a price range or a strict $37? I only ask because if you plan on owning it for 15, 20, 25+ years a dollar or two isnt a huge deal when you consider both the expected organic and dividend growth. Personally I do an analysis that gives me a range and if it falls inside that, I feel comfortable pulling the trigger. If not, I wait. But obviously it is personal preference. To your question, I would never pay overvaluation prices just to diversify. I would either sit on the cash and wait or load up on 'inexpensive' stocks to bolster my portfolio. For example, if GE falls to $5, $12, etc I am throwing as much cash as I can at it even if my portfolio weighting gets out of whack.

  9. Tim McAleenan says:

    John, I don't know if I have anything useful that applies to your situation, but I'll try:

    I usually try to do three things simultaneously.

    (1) Build up cash so that I can strike when recessionary prices hit. Everyone talks about buying low, but it takes preparation to do that successfully–the money has got to come from somewhere! Stockpiling 1/3 of your investable funds for those 2008-2009 situations is something that strikes me as intelligent value investing–people like Templeton, Munger, Schloss, etc. always seem to have cash on hand when they need it most. Cash is no fun to pile up (it sits there doing nothing while your mind wanders to the different ways you could

    (2) Also be focusing on strengthening some pillar of your portfolio. We all have our ideas of what the 15-20 most dominant companies in the world are–Coke, Pepsi, Colgate, P&G, J&J, Exxon, Chevron, etc.–and I try to be adding to one of them at any given time. Coca-Cola has been cheap, what, three times since the 1980s? And they were generally for short-lived moments of time. At $39 per share, you're going to achieve future returns that mimic Coca-Cola earnings per share growth rate if you hold 15+ years, so why not be content with that, given the extraordinarily high quality of the holding? I always want at least a 1/3 (ideally more) of the investable funds going towards the top companies.

    (3) The last category is straight up value investing. That's where I'm concerned about the future dividends (and, if I have a medium-term holding period in mind, also the capital appreciation) that the company will be generating 5+ years from now in relation to the money I put into the investment. That's what has led me to Bank of America at $7-$8, BP in the $39-$43 range, and recently, Royal Dutch Shell around $67. We'll see how that plays out come 2018, 2019, 2020. This category deserves its own third of investable dollars.

    The 1/3 demarcations isn't something I'm following closely right now, but it serves as a guidepost of sorts for where I'd like to be and is useful for re-orienting myself when I get too far astray.

  10. Tim McAleenan says:

    Ryan, assuming those companies are companies with sound moats and spread across multiple industries (i.e. you don't have 80% of your wealth in 20 oil stocks), that sounds perfectly reasonable. A bankruptcy of a company would only set you back 4%, and it's likely the dividend growth from the other companies could offset that completely over the course of 12-24 months depending on your holding. Once you reach a number of holdings you're content with (maybe you own all the high quality in your circle of competence that you desire), then the new money would go towards stocks that you already own. Nothing wrong with that.

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