Dividend Growth Investing Takes Guts

I opened my first private brokerage account in 2011.  Sure, I had a 401K and a Roth IRA, but these accounts were made up of index funds using an automated contribution scheme.  The private brokerage account was my first plunge into the wonderful world of buying and selling individual stocks.

 

I started off like so many do, trying to make a big score.  I put money, mostly randomly, into popular companies I was familiar with.  I put some research into it – I read the analyst opinion summaries – but the last thing I was doing was reading balance sheets, income statements and quarterly and annual reports.  What are all those things exactly?  I would put money in these stocks, they’d fluctuate a bit, and after I’d make 10% I’d sell and move my money into the next stock that tickled my fancy, all the while unaware the trade commissions and tax penalties were decimating my paltry gains.  I even tried my luck at penny stocks.  The first penny stock I hit out of the ballpark, quadrupling my money.  The next few went to zero, wiping out all my initial gains.

 

I consider myself very lucky.  Throughout those very early years, I managed to teach myself a lot of lessons during an incredible bull market.  Through all my poor decisions, I still came out making money thanks to this relentless bull market run.  While the Compounded Annual Growth Rate (CAGR) of that portfolio as it stands today would likely be triple or more had I not made so many silly trades and just bought and held, collecting and reinvesting dividends along the way, I still managed decent returns over the ensuing nearly half decade.

 

And here I am, 28 years old – still at the beginning of my investment lifetime – having been paid to learn these valuable lessons that so many never learn, I feel incredibly fortunate.

 

The second 50% of my portfolio’s current life has vastly outperformed the first 50% because I completely changed my investment strategy.

 

I Am Maturing Into A Dividend Growth Investor

 

I am largely uninterested in “trading.”  Sure, there may be circumstances where a particular equity is facing longterm or permanent financial impairment, or becomes so insanely overvalued it only makes sense to sell and pay the tax penalty so those funds can be reallocated.  These will be the exceptions, not the rule.  For the most part, my investing strategy is if I purchase a stock, it is a stock I would like to hold for life, using the ever-growing dividend income stream for retirement income without ever touching the principle itself.  When I die, that equity would then be transferred to my children and grandchildren, where it can provide them with a reliable stream of dividend income for them to use for their entire lives.  In my idea of a perfect world, those equities would keep changing hands down the family tree, growing and growing, churning out more and more cash for my family throughout the centuries.  My legacy would be countless wealthy generations of descendants.  That’s the dream, anyway.

 

The Oil Rout of 2014-2015

 

Entering into the market during 2011 gave me a lot of latitude for learning how to invest.  The market crash of 2008/2009 left wonderful blue chip companies extremely undervalued, trading at earnings multiples not seen for decades.  When wonderful businesses are trading at deep discounts simply due to general fear rather than their fundamentals, exceptional long term gains tend to follow.  Profits for these businesses were still great during the crisis.  Investors were just afraid to pay a fair price for them, leading to big discounts.  Once I started learning a deeper understanding of how to assess the values of stocks, the relentless bull market had alleviated all that fear that created such wonderful buying opportunities.  In today’s market, most blue chip stocks are overvalued, some obscenely.  It is now commonplace to find slow-growing blue chip behemoths that typically trade with earnings multiples of 12-16x now trading at 25-35x earnings or beyond.  These low earnings yields have significant downside risk and will make longterm gains hard to come by.  Overpaying for a wonderful company is not a solid investment strategy.

 

Black Friday 2014, was an exciting day in the stock market.  Oil prices had begun moving backward for some time previous, bucking a relatively stable half-decade long trend of $80-100/barrel oil.  On November 28, 2014, OPEC announced they would not reduce oil production.  Rather, they would allow the market to determine in the price.  This, of course, was an attempt for OPEC to reclaim marketshare lost by the shale revolution in the US.  Oil prices went into a free-fall.  This free-fall continued for weeks, with oil bottoming out in the low $40’s.  This nosedive in oil took the oil major’s stocks with them.

 

The oil business is a cyclical industry.  Every decade or so, there is an oil price collapse.  The price collapse triggers panic and distress.  Smaller, weaker players tend to suffer huge losses they cannot fully absorb.  The larger oil players with cash on hand tend to weather the storm and buy up the struggling weaker players at huge discounts, taking their assets, patents and infrastructure with them.  Once oil commodity prices stabilize and rebound, the large companies tend to emerge stronger.  This panic, to me, signaled a major buying opportunity.  I spent the next few weeks researching oil companies, all the while oil prices continued to plummet.

 

At the start of the new year, I decided to take advantage of the oil price collapse and open up a Dividend Reinvestment Plan (DRIP) with Chevron, one of the largest integrated oil companies in the world.  Why I chose Chevron over companies such as Exxon, BP, ConocoPhilips or another competitor is due to a mix of fundamentals – P/E ttm, forward P/E, cash on hand, total market capitalization, dividend yield, current construction projects in the works, fees associated with the DRIP itself – every individual may reach a different outcome and Chevron just happened to be my personal conclusion.

 

I began with a “significant to me” initial investment to get the ball rolling.  Since then, I have been making regular “significant to me” contributions every few weeks, trying to average myself a good position in the stock.  Between multiple individual allocations and two dividend reinvestments to date, I have averaged myself a position of $105.47/share.  This is substantially lower than the 52-week high of $135.10/share.  It is also significantly higher than today’s closing price of $93.78/share.

 

This is where it takes real discipline to be an investor.  No, discipline isn’t enough.  It takes downright guts.  Discipline, guts and perseverance.  I am currently staring at a paper loss of 11.08%.  After several weeks of oil stabilizing in the $55-62/barrel range, the oil slide has resumed due to worldwide growth concerns stemming from renewed fears of Greek debt, a free-falling China and the possible lifting of an oil embargo on Iranian oil exports.  The oil major’s stocks are free-falling alongside all this news.  Chevron’s ongoing gigantic liquid natural gas projects – a substantial investment for their future that drove my attention to Chevron’s stock in the first place – are seeing major cost overruns and equipment failures.  The future certainly looks bleak, and it is tempting to cut and run and take this paper loss before it gets even worse.

 

Still, I plan to fight this emotion with logic and continue to buy the stock at regular intervals on the way down in an attempt to average my cost lower and lower.  Chevron, a stock I didn’t own a single penny of six months ago, is now my largest individual holding, and given the overall overvaluing of the market as a whole, I plan on continuing to expand that position at considerable risk.

 

My Greatest Asset Is Time

 

I feel incredibly fortunate to be 28 have learned the investing lessons that I have.  I have seen many people approaching retirement, and even retirees themselves, with no solid plan to manage their savings.  Learning these lessons has truly felt like a gift, and I am grateful to have learned while still at the beginning of my investment lifetime.   On a 30 year horizon, I don’t see how a position in CVX could lose barring:

1.) I sell the stock
2.) Bankruptcy
3.) Huge dividend cut

I feel Options 1&2 are very unlikely.  Chevron has endured far worse market conditions than these in the past.  Option #3 is possible, but as a Dividend Aristocrat that has increased its dividend for 27 consecutive years, the top priority of management seems to be to maintain the dividend at all costs.  Through all of today’s terrible news, I feel the least secure thing I can do is nothing, which will happen if I were to wait on the fence for the bottom I know I cannot time.  My plan is to stare the paper losses in the face and smile, continuing to buy in as much as I can afford to and watch the losses accumulate in the short term.  In the long term, I want to turn these dividends into my own type of private “social security” style fund in the decades to come.

 

Time will tell if my investment will pay off.

All information found herein, including any ideas, opinions, views, predictions, commentaries, forecasts, suggestions or stock picks, expressed or implied, are for informational, entertainment or educational purposes only and should not be construed as personal investment advice. I am not a licensed investment adviser.

Anthony

Leave a Reply

Your email address will not be published. Required fields are marked *