Micro Blog #21 My Tactics For Investing In Dividend Stocks

Alright, so today I'm going to share with you my tactics for investing in stocks, especially dividend paying stocks. Tactics are what I use to execute my investment strategy to meet my investment objectives (see the last two blog posts).

In my investment philosophy, tactics are simply methods for executing stock buy and sell transactions based on some triggers or technical metrics or a list or a combination of all.

Valuations

I mainly use valuations in a bear or choppy market to get the best or fair price possible for a given stock. At times, I may also use valuation to sell a stock if it is overly valued. Idea is to have as wide of a margin of safety as possible when fear is high. In bear market you want safety in price you pay. Even if you say, you are a long-term investor, it's in human psychology that we don't like to see losing money, even on paper.

In other words, when people see too much red in their portfolio, they are prone to make bad decisions of selling too early or at a huge loss. Having a nice margin of safety allows for more green in the portfolio even when overall market may be down 20% or more. this allows for cooler minds and better decisions. Therefore, buying at or below fair valuation is a good tactic in bear market.

In a bull market, I don't look for cheap or under-performing stocks as they are likely the ones with underlying company specific troubles and usually high risks. Therefore, I'm better off buying companies that are performing well, even if their valuation is high.

Momentum vs. Margin of Safety

Momentum is a tactic I use in a bull market, such as the one we have had in the past 9 or so years. I must admit that in the beginning or first several years of my investing career, I was mostly investing based on valuations. But then, I realized that if I pay too much attention to valuations in a raging bull market, I would miss out owning some great momentum stocks like BA, DLR, ABBV, and utilities like D.

For the past several years, utilities have done great due to low interest rate environment and because I kept adding to them, I now have large size positions in multiple blue chip utilities paying huge and growing dividends with a nice margin of safety. I don't care if rising interest rate environment moves them lower in price, my positions will still show me lots of green with constant supply of cash in the form of growing dividends. Even better, in the changing market narrative, I would be able to continue to add to utilities without thinking much about valuations, because I have margin of safety.

Building Size

Building size is an important tactic for me when investing for dividends or cap gains. A 100% of nothing is still nothing. Keeping that in mind, I want to build share count in the best stocks even if they are trading at historically high valuations. A 10% of something is still something.

Boeing is my highest performing stock last year and is also my largest position. If I had worried about valuation, I would have missed out on adding more shares in this high flying best performing stock of 2017.

Next-Man-Up List

This is a tactic I learned following some veteran investors on Seeking Alpha. The idea is to have a list of stocks that you want to own and then buy shares in each of the companies in the list based on their turn. How you determine which one is next in turn is up to you. For example, I use current yield as a method to prioritize the list.

Prioritization with current yield helps me grab the highest yielding stock in my Next-Man-Up list while giving the lower yielders time to move up. Lower yielders are not going anywhere, I might as well add higher yielders first as they would generate more cash flow, which then can be used to buy the lower yielding ones.

The Next-Man-Up list also keeps me focused on the stocks that I've already vetted and do not require much thinking when new money or a buy opportunity comes. For example, when the stock market took a 1600 pts nose dive on Feb 5, I was able to act fast and buy shares in companies on my next-man-up list. I was still executing per plan, so there was no panic and no need for thinking or waiting for what to do.

To Sum It Up

Market is too dynamic and requires change in mentality and tactics when overall narrative changes. Therefore, you should be willing to change your tactics, should the market conditions change. It will allow you to take advantage of the current market conditions and not be left out or freeze when opportunity comes knocking at your door.

Comments

  1. I like the Next-Man-Up approach. I have a white board with a list of several companies for future purchases in front of me in my office. Keeps them fresh on my mind that way.

    Your point about valuations is very well received. I think too many people get hung up on this and miss big gains. If you are hell bent on waiting for rock bottom pricing, you might miss the boat.

    All the best good sir.

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    1. Ahh white board, yes I used to have one in my home office for the same purpose but then I found myself having all the colored marker ink on my hands and fingers, it was a mess to tell you the truth. So, now I use my spreadsheet for the list :)

      Yup, valuation is tricky, you have to know when to apply it and when not to, and it's not always a clear cut decision but with experience you get better at it.

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  2. Mr. ATM, Nice and well rounded "portfolio" of tactics to execute your strategy and achieve your objectives. Tom

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  3. Sucks I haven't had as much time lately to comment on posts. Don't worry I keep up with reading them at least haha. I like your take on this. A few great points. Building up positions especially. Red days should get a long term investor excited for buying opportunities. Although at the same time, you can only average down so much before you find yourself into a value trap or stop being able to add to a position. Sometimes it is better to add to a great position at a fair price even if it is over cost basis. Theoretically stocks should go up over time so after a while of holding long term, the cost basis will be unreachable ever again.

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    1. As the judge said in the movie "My Cousin Vinny": That's a lucid, intelligent, well thought out comment" Mr. Daze and I thank you for that :)

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  4. I'm Fully on board with the Focus on valuations. It is a very difficult art / science to become good at, and even more difficult when markets become volatile. Has the outlook for the business changed at all, or is the Market just freaking out over something unrelated? Or if some bad news comes out from the company, it it only short term, or does it actually impact the longer-term value of the company?

    I like that you stick to the good quality companies though, and don't mind paying 'full' value for them if you have to. I've always had a tendency to go for the really 'deep value' stocks - which often just means they are in deep deep trouble! A little more focused on good dividend payers and better quality companies these days...

    Do you have any specific valuation metrics you focus on more than others?

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    1. 5 yr Normal P/E (P/FFO for REITs) and 5 yr highest historical dividend yield are the two valuation metrics I pay most attention to.

      Though, the 5 yr historic yield metric would trump any other valuation metric for me. In other words, if a stock is trading at or near its highest 5-yr highest yield even when earnings multiples are high, I would consider it to be a good value. It may not be cheap, but it would still be a good value from yield perspective, given that the company has continued to raise its dividends in the past and there are no forward looking risks to its dividend.

      The other thing to note is that for most dividend paying companies, the 5 yr highest historical dividend yield provides a bottom support for its price. On the flip side, if the yield exceeds its 5-year highest yield, then I would consider the stock to be too risky (unless it was caused by a broader market action).

      Valuation through dividend yield is not a new concept, it was somewhat invented by the mother of dividend investing Geraldine Weiss. She is the Ben Graham of dividend investing.

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  5. I think one of my issues as an investor is that I'm too unwilling to pull the trigger on growing stocks. I keep waiting for a better price point on fast growing companies like Google or ATVI or Amazon and they just never come.

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    1. For a fast growing company, you can't set a single target buy price point because the price is moving so fast, whatever price you set or have in mind, would likely be blown past quickly and with every passing time, the probability of hitting that price would simply get slimmer.

      Now you can say that you would buy such a stock/s if there was a correction of 5%, 10%, or 20% or whatever you like, but then you have be ready to pull a trigger when such corrections come. Most people are not fast enough to take advantage of such corrections.

      Did you buy these stocks when they corrected almost 10% last month?

      A better strategy to get into these fast growing stocks would be to just buy it in small amounts at whatever price they are trading at and then keep adding at equal intervals and amounts. Long-term it should work out.

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  6. Interesting theories, I really like the Next-Man-UP concept. You pointed out on my blog that I should also expand on existing positions instead of always buying something new. That is something I'm aware of.

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    1. I think once you have reached the number of stocks you want to hold in a portfolio, the next thing would be to just focus on building those stocks. At least that's how I built my portfolio. In other words, I'm not constantly looking into buying new stocks. I'm more in a build-up/maintenance mode.

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