There have been many articles and books written about what it takes to be a successful investor. As I read these articles, I agreed that many of these qualities are helpful, if not necessary, for someone to be a successful Dividend Growth Investor (DGIer). A lack of any one of them could lead to failure. To be a successful DGI investor I believe you must embrace these qualities and attempt to adopt all of them as you learn, and put into practice, Dividend Growth Investing (DGI).
As this is the introductory article to the Part-Time Investor newsletter, I thought this would be a good first article. An Introduction to the qualities common to those who practice DGI.
1. Highly successful investors are proactive learners
Before you start to invest you must read. A LOT! You must learn how the market works. You must learn what types of investing methods exist. And you must learn all the terms that are thrown around Wall Street and the investing world. Read what other people are doing, and have done, and learn from their mistakes. There is always more to learn, and investors can always learn more. Even Warren Buffett.
All DGIers I know have read about, and tried, many different styles of investing before they discovered and converted to DGI. They are familiar with many different forms of investing. And they continue to read about, and discuss, different aspects of investing. But through their learning, and experience, that have found that DGI works best for them. And with the store of knowledge they have gained they are able to successfully execute DGI. So never stop reading, listening, or watching videos if that works for you. And keep learning. Always.
2. They have a well-defined investing strategy
DGI investors have a well thought out investing plan laid out by them before they ever start investing. They have buying criteria and selling criteria. They have rules for management of the portfolio, including the number of stocks they are willing to hold, the relative sizes of the positions, whether or not they will rebalance at regular intervals, and how they will reinvest their dividends. All the details should be written down so the investor can refer to it when their emotions start to get the better of them.
3. They always invest with a planned exit strategy
As part of their investing strategy they always know how they will exit a position. This is essential. Everybody I know who is a successful DGI investors knows, even before they buy a stock, what will cause them to sell it. Some of the reasons could be if the dividend growth slows. Or if earnings do not meet their expectations. Or if something about the company’s business changes. For the Part-Time Investor portfolios, we always know what our selling criteria are. And these are all explained on each of the portfolio pages. In some cases, we sell if and only if the company cuts its dividend. In other cases, we sell at the beginning of a new year when it’s time to pick new stocks. But in all cases, it is spelled out as part of the investment plan even before we buy our first share of stock.
By knowing beforehand why you will sell, by knowing what your exit plan is, you don’t have to worry about fear and emotions affecting your investing decisions.
4. Highly successful investors have strong emotional control
This ties in with what I said for characteristic #2 and #3. DGI investors control their emotions. They don’t let panic, fear, or excitement change their plan. They don’t get caught up in exuberant buying or panic selling. By developing a plan, and sticking to that plan, they are able to weather all types of markets, and all types of stock movements.
The stock market, by its very nature, is volatile. It overreacts to news. Emotions can work against you when you experience all this volatility. But DGI investors use this to their advantage. When prices are down because people are panicking, we see that as buying opportunities. We look to see if the dividend growth is still intact, not whether people are dumping the stock. And by looking at things rationally, methodically and logically we understand that since the stock’s fundamentals are unchanged, the stock’s price will eventually move back up. This helps us to control our emotions and take advantage of buying opportunities presented by the market’s overreactions.
If you are watching stocks go up and down you may end up making emotional decisions, buying or selling at the wrong time. And in the end these hasty moves may work against you. But with DGI, you focus on the dividend, not on the stock price. So you are, for the most part, unaffected by the emotional roller coaster ride that can be the stock market. During bear markets, as prices drop, as long as your dividends keep increasing, you are able to keep your emotions in check and continue to hold on until the market inevitably bounces back.
5. They are contrarian
As Warren Buffett said (and I paraphrase) you should be greedy when everybody else is fearful, and fearful when everybody else is greedy. When prices are down, DGIers grab up cheap DGI stocks. When others are selling, DGIers are buying. This is because we see that for many DGI stocks, the dividend growth continues, even as the stock price drops. And since the dividend growth is still intact, we know that the price will eventually recover. To DGIers we see these times as opportunities to buy stocks on sale.
A perfect example of this is the financial meltdown of 2007-2009. Dividend growth investors were snapping up shares of dividend champions whose prices had dropped due to the market crash. They knew that even though everybody else was selling, these companies were still strong financially, and were still raising their dividends. As the market finally turned around these stocks returned to, and even surpassed, their pre-meltdown prices. And the whole time the dividends kept rolling in.
6. They set their own goals
Most DGIers I know are investing for their retirement. They are planning on using their dividend income to fund all their living expenses once they are no longer working. They determine what income they desire, and then they build a plan that allows them to achieve that income. Their expectations are that they won’t be forced to sell any of their stock shares because their dividends should cover all their expenses. Therefore, DGIers set goals based on what kind of dividend income they can expect to produce, not based on what the value of their portfolio eventually be.
7. They are patient
DGI investors take the time to read to learn about investing and the stock market. We study different investing methods and read what other investors are doing. In this way we learn what has been successful in the past, and what has not. And then we take the time to develop an investing plan based on dividends.
Once the plan is in place, we are patient. First, by not buying any stock too early, and second by holding those stocks through tough times. Even if we love a particular company, we wait for the stock price to meet our criteria. Our valuation. We know that eventually a buying opportunity will come along. And if not, we will simply buy other stocks that do meet our criteria.
DGI is a long-term plan. It takes many years, even decades to come to fruition. But by focusing on the growth of the dividends we are receiving in our portfolios we are able to sit back and watch, slowly but surely, as the value of our portfolio rises.
Successful investors need to be able to wait until their plan leads to success. They need to be able to wait through some tough times. DGIers know that DGI is a long-term strategy. None of them are expecting to get rich quick. By choosing DGI they know they can relax through all sorts of market cycles, over many years and decades, and continue to collect and reinvest their dividends quarter after quarter, year after year, and that in the end the results will be exceptional.
8. They are focused
There are many different investing plans which may work, but I don’t think any one investor can successfully use more than one or two. It simply gets too confusing to be investing many different ways all at once. Focusing on a single philosophy is the best way to get that philosophy to be successful.
DGI investors have chosen the DGI philosophy because it works, and because it suits their personality and investing needs. And they focus on the dividend, and the dividend income, because that is what helps them stay the course and stay invested for the long term. By tuning out all the other extraneous information, especially the stock price, they are able to stick to their investing plan.
9. They are disciplined
See the sections on patience, persistence and having a well-defined investment strategy. All of this is possible because DGI investors are disciplined. Once you define your investing strategy and your rules, you must stick to them. You must be disciplined in carrying them out. And fortunately for DGIers, seeing your ever-increasing dividends rolling in helps you to stay disciplined, because you are constantly reminded of what you are investing for and how well it is working.
Conversely, if your plan is not working, you must have the discipline to study it and figure out why, and then take the time to change it as needed.
10. They learn quickly from their mistakes
And just as importantly they learn from other people’s mistakes. DGI investors are always learning, by talking to people, reading books, online articles, blogs, and the from their own experiences. In this way they can continually modify their investment plan and improve it as time goes by.
11. They know how to manage risk
I don’t believe the general “rule” that to increase your return an investor must take on more risk. DGI does exactly the opposite. I believe it decreases risk because DGIers invest in mature, well-run companies, with proven track records of returning profits to their shareholders. The dividends themselves decrease risk because regardless of what the stock price does you are getting a return on your money. And as the dividend increases, year after year, the stock price can’t help but follow along eventually. I believe that well-constructed DGI portfolios actually decreases risk, while still delivering acceptable, possibly even market-beating returns.
12. They are willing to learn from others
Almost everything I know about DGI I learned from others. And I continue to do so. I still go to Seeking Alpha to read other people’s articles and comments, and I still find some good books to read about investing. I also re-read some books that I had read in the past. And almost every time I do, I gain a valuable new insight.
Nobody will ever know all there is to know about DGI, or any form of investing. You must always be willing to learn more and improve your plan, and there are plenty of people out there willing to help.
Anybody can be a DGIer, because it is such a simple, straight forward investing method. But to be successful you must adopt the characteristics listed above. Patience may not come naturally to you. But a DGI portfolio requires patience. Because it is a long-term process, one that will take years, if not decades, to reach fruition. You must have the willingness to learn about DGI from others, you must be able to set out a game plan with rules for your investing, and you must have the discipline and focus to stick to the plan, even as others are panicking due to a weak market.
Study what others do, set up a plan, including your exit strategy, be contrarian, and then follow through on your plan and your goals. And don’t be afraid to modify the plan if it’s not working. In this way you too can be a successful DGIer.