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Value Focused Dividend Growth Investing: Easy To Do, Difficult To Master

Posted On November 27, 2016 10:20 pm
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In today’s world of ever present financial media, such as CNBC, Fox Business, and Bloomberg TV, as well as a sea of investing sites, and blogs, it’s easy to come across certain plausible sounding stories that seem to make sense. Better yet, they offer actionable investment ideas that seem to be a great way to get ahead of the market, and earn outsized returns relatively quickly.

For example, back in 2015 when oil prices fell to $55, half of their June 2014 highs due to OPEC’s war for market share, the idea that oil stocks were suddenly cheap and a great contrarian value investment seemed like a sure thing. After all, oil companies around the world were falling all over themselves slashing capital spending, which in the long-term would mean lower production and higher prices. And with oil prices now at just half their previous year’s level many were expecting crude to bottom soon, since the break even price for US shale producers was thought to be $70.

Yet oil prices kept falling, and didn’t bottom until January 2016, at $26. Why? Simply put the market was wrong about the break even price of US shale oil. New drilling techniques such as multiple wells per drill pad, closer spaced drill pads, longer laterals, more frack stages per lateral, and up to 20,000 tons (2 train loads) of frack sand per well allowed production to soar with minimal additional upfront investment and allowed some oil companies such as EOG Resources (EOG) to claim they could earn a 10% return at just $30 per barrel.

Add in the highly indebted nature of many shale producers, who were desperate for cash to service their debts in order to avoid bankruptcy, and suddenly the reality proved everyone wrong.

Now that’s not to say that anyone buying quality oil dividend names such as ExxonMobil (XOM), or Enterprise Products Partners (EPD) earlier was wrong. After all these are some solid, proven companies with long track records of growing payouts during any and all oil price environments.

However, my point is that if you truly want to stand out apart from the crowd, and achieve the kinds of truly sensational returns that put Wall Street to shame, (and can grow your wealth faster than you ever thought possible), you have to realize the hard truth about contrarian, value investing.

Mainly that it’s incredibly easy to understand and get excited about when stocks are rising, BUT very hard to actually master. When prices seem to have gone over a cliff with a rocket strapped to their backs then fear, uncertainty, and doubt are natural.

It hurts twice as much to lose a dollar as to make a dollar, and so buying on the dips, what some call “catching a falling knife” can seem dangerous, foolish, and impossible to continue as you watch your holdings continue to slide.

However, just remember that these very emotions that can cost you sleep at night are the very thing that also allows you to make a fortune if you can set yourself up for success. In other words, if you can be one of the select few who can truly master your emotions and “be greedy when others are fearful” then you can pretty much assure yourself of success.

The key is to set up a plan ahead of time to take advantage of market insanity.

1. Build a watchlist of quality dividend growth stocks that match your risk tolerances, and that you wouldn’t mind owning for the next 10, 20, or even 30 years.

2. Wait for a “fat pitch” ie market presenting an obvious opportunity, such as Tyson Foods (TSN) recently falling 15% on a disappointing earnings announcement.

3. The hardest part: invest fearlessly, buying on dips per your pre-determined investment plan.

For example, if you buy after a 5%, 10%, or 15% dip then the more the stock falls all the better. You can build up a substantial amount of stock at better and better prices, ie higher, and higher yields.

You need to have faith in yourself, your due diligence (to make sure the companies are grade A and will survive with dividends intact and still growing), at which point the same market mayhem that terrifies others has you laughing and buying shares with both hands.

4. Second hardest part: be patient, sit on your hands, and wait for the market to realize it’s wrong and your stocks to rise. Sometimes, as with oil stocks which are still floundering due to the worst oil crash in over 50 years, this can take YEARS.

5. Let your winners run: It’s easy to get excited and see a stock you bought all the way down 60%, 70%, or even 80% double or triple in a few months and want to sell and lock in the profits. BUT remember that the name of the game is income growth and those super cheap shares have a locked in high yield that will only grow with time as the company raises the dividend.

In other words, unless you truly have a far better investment opportunity staring you in the face, don’t cut your victory short. Hold, and enjoy that high income yield, reinvesting the dividend stream into whatever else the market is undervaluing at the moment.

This is the key to becoming a master capital allocator and not just doing well in the markets, but smashing them and achieving the kinds of legendary returns (15%, 20%, even 25% CAGR for decades) that can help almost anyone reach their wildest financial dreams, much faster than they ever thought possible.

About author

Dividend Sensei
Dividend Sensei

I’m an Army veteran and former energy dividend writer for The Motley Fool. I currently write for both Seeking Alpha, Simply Safe Dividends, Investorplace.com, and TheStreet.com.

My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams, and enrich their lives. With 20 years of investing experience, I’ve learned what works and more importantly, what doesn’t, when it comes to building long-term wealth and income streams. I’m currently on an epic quest to build a broadly diversified, high-quality, high-yield dividend growth portfolio that:

1. Pays a 4% to 5% yield
2. Offers 9% to 10% annual dividend growth
3. Pays dividends AT LEAST on a weekly, but preferably, daily basis

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