By Zachary Storella
Dividend paying stocks, a favorite target of many savvy long-term investors, seem to be getting extra attention in today’s current market environment. The fact that bond yields reside at very low levels and are giving off very little income, dividend stocks have been highly in demand for those looking to gain a little extra yield from their investments.
To better understand this interesting category of investing, I am very pleased to bring you an interview with Ben Reynolds of SureDividend.com. Ben has written many insightful articles on the subject that I highly recommend including The Best Dividend ETF: Data-Driven Answers, The 8 Rules of Dividend Investing and Starting from Scratch: Building Your Dividend Growth Portfolio.
In this interview, we touch upon the basics of dividend investing, dividend stocks vs ETFs, what attracts him to his investments as well as what resources he uses in his analysis.
(Questions in bold)
Can you give us a brief history on how you got started with dividend investing and a little bit of background of Sure Dividend?
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My investing journey started with a great interest in value investing. That interest has never gone away. I have also explored momentum strategies and various ETF based strategies in detail.
What attracted me to dividend investing in general is its simplicity. You don’t need to continuously identify bargains like in value investing. You don’t need to churn your account to exploit the hottest stock or fund like with most momentum strategies.
So that’s what attracted me to dividend investing.
As far as Sure Dividend goes, I wanted to build a tool for individual investors to quickly and systematically identify high quality dividend growth stocks trading at good prices.
I believe quantitative rule based systems have an edge because they do not suffer (or suffer less – someone built them) from human biases. I built The 8 Rules of Dividend Investing to systematically rank high quality dividend growth stocks. That is the foundation of Sure Dividend.
For those of us who don’t know much about dividend investing, can you give us a brief primer on the ins and outs of dividends stocks?
Absolutely! Dividend investing in general is a very broad topic. In brief, dividend investors look for stocks that pay dividends (what a shocker…).
Dividend investors are more apt to hold stocks for longer periods of time and care about dividend growth as much (or more than) short-term stock price movements.
There are many different ‘flavors’ of dividend investing:
Sure Dividend most closely follows dividend growth investing, which is where all the evidence I’ve seen points toward providing the best risk-adjusted returns in the dividend investing universe.
What most attracted you to investing in dividend stocks?
I think I’ve already covered this topic a bit, but I will go over some more key points here.
Dividend stocks help investors to see beyond stock prices. Dividend investing tends to look at income and less at stock price movement.
I follow the Benjamin Graham idea that the stock market is a voting machine in the short run (based on sentiment), but a weighing machine in the long run (based on business performance).
Businesses that are able to reliably pay growing dividends over many years are likely to be able to continue growing their businesses. Over time this will result in higher stock prices… And you get to enjoy a nice growing dividend income stream along the way.
What attracts me to dividend investing is a mix of its historical efficacy and its simplicity. You buy great businesses with shareholder friendly managements and hold for the long run. It just makes sense (at least to me).
There are now many popular dividend ETFs. Is investing in dividend ETFs the better way to go rather than investing directly into companies? Is there an advantage to one over the other?
This is an excellent question. I don’t think there’s one right answer. I actually recently wrote an article coverings this subject called index investing versus dividend investing.
Both investing in individual securities and in low cost ETFs can be very cost effective.
The biggest trade off is one of focus versus diversification.
ETFs offer fantastic diversification for very low management fees. You can’t beat the diversification of an ETF when you are an individual stock investor.
Where individual stocks have an advantage is focus. An Example is Warren Buffett. His top 4 holdings make up over 60% of his portfolio. He is very focused on his best ideas (and his results have been fantastic, obviously).
When you invest in individual stocks you can invest more in your best ideas.
When you find a great business trading at a deep discount, you can invest heavily in it to produce outsized returns (which I believe will happen on average with this type of opportunity, not on every single one). You can’t do that with ETFs.
So to clarify, the tradeoff is diversification versus focus. For some, diversification trumps focus. For others, focus is preferred.
What is the biggest risk involved with investing in dividend ETFs or dividend stocks?
With investing in individual stocks, the biggest risk is that the business will go bankrupt and you will suffer 100% loses. This doesn’t happen often, but it does happen.
With ETFs, you don’t have that risk (unless every stock in the market went to 0, in which case you have much bigger problems than money).
The biggest risk involved with investing in ETFs is probably facing the potential bankruptcy or insolvency of the ETF issuing company. If the company acted improperly, it could result in significant (or total) losses.
I think those are the worst case scenarios involved.
From your experience, when is it a good time (what type of market, economic cycle, etc?) to invest in dividend stocks? Conversely, is there a time you would rather not be invested in dividend stocks?
I am a buy and hold investor, so I don’t try to time the market.
I don’t sell when I think the market is overvalued (and yes, I think it is quite overvalued right now).
The best time to buy dividend stocks (and pretty much any stock, for that matter) is during recessions and panics. The more severe, the better. When people panic, that’s when you get the best opportunities.
When the market is overvalued, there are less high quality businesses trading at fair or better prices around. Coca-Cola (KO) is a good example. It’s a great business, but it’s currently trading at a price-to-earnings ratio of around 23 (using adjusted earnings). I wouldn’t buy in at those prices.
Can you tell us what tools or resources do you use to evaluate your dividend ideas?
Absolutely. I already discussed my systematic 8 Rules ranking system earlier, so I’ll move past that.
Some of the following tools are my favorites for analyzing stocks and gathering data:
With suredividend.com being a great resource on this subject, are there any other dividend investing websites out there that you would recommend for readers?
Absolutely. Thanks for mentioning my site. In addition, some of my favorites are:
Besides suredividend.com, is there other ways for readers to follow along with your content?
Yes, you can follow me or contact me on:
Thank you very much Ben for taking the time to answer my questions in our latest interview. To read more about dividend investing and Ben’s analysis, please visit his website at suredividend.com or at the other social media links he kindly provided above.
