7 Habits Of Highly Effective Dividend Investors 

Dividend investors come in all different shapes and sizes. Many of us are living off dividends in retirement, while others are investing for long-term income growth and capital appreciation.

Regardless of our objectives, we are united by our desires to reduce risk and make responsible investment decisions.

However, even the best of us have fallen into traps over the years.

For example, numerous academic studies have shown that individual investors are incredibly poor at trying to time the market and are prone to letting their emotions get the best of them.


Dividend Investors
Photo by stevepb (Pixabay)

Investors pulled $16 billion from U.S. stock funds in 2009 while stocks were at their lowest prices in a decade, according to a recent Bloomberg article citing a Morningstar report.

Another Morningstar report found that “over the 10-year period ended December 2015, investors cost themselves from 0.74% to as much as 1.32% per year by mistiming their purchases and sales…”

If we are not careful managing our emotions, expectations, and investment processes, there can be severe consequences.

The following seven habits can help us become more effective with our dividend investing and reduce the number of avoidable mistakes that are otherwise waiting to trip us up.

1. They stick with what they know

I enjoy watching baseball when I get the chance, although my Chicago White Sox have been disappointing to say the least this season.

Ted Williams is a Hall of Famer who is well-known for the .406 batting average he posted in 1941. He was the last major league baseball player to hit over .400 in a season, and his career on-base percentage of .482 is the highest of all time.

What was behind Ted’s success at the plate? Besides his work ethic, discipline, and exceptional eyesight (Ted avoided movie theatres growing up to protect his vision), Ted was an extremely disciplined hitter.

He divided the strike zone into 77 baseball-sized cells and studied which cells he was best at hitting.

Armed with this knowledge, Ted would only swing at pitches that were thrown in one of his best cells to maximize his chance of getting hits and reaching base.

What does this have to do with dividend investing? We are thrown thousands of pitches each day in the form of dividend-paying stocks.

Our job is to identify our own “cells” that maximize our chance of hitting our investment goals (pun intended).

I have said it before and will say it again, but of the 10,000+ publicly-traded stocks out there, I estimate there are only a few hundred that I would ever feel comfortable owning in my portfolio at the right price.

There are thousands of companies and dozens of industries that are too complex or unstable for me to get interested in.

Buying these types of businesses that are outside of my circle of competence would be pure speculation and a silly way to lose money.

Unlike Ted, we don’t have to worry about striking out as we wait for our pitch. Disciplined dividend investors have the luxury of waiting for the market to throw a fastball in their wheelhouse.

It doesn’t matter if you are investing in stocks, bonds, funds, or real estate. Perhaps the number one best investment habit to form is only investing hard-earned money in ideas that are simple to understand and play to our strengths.

There are thousands of fish in the sea, and we only need a couple dozen companies to build a high quality dividend portfolio. Don’t settle.

2. They think independently and conduct their own research

One of my favorite investing books is The Little Book of Behavioral Investing. It states many truths that I witnessed firsthand when I worked as an equity research analyst.

Perhaps one of the greatest misconceptions is that stock “experts” are usually successful with their predictions and know what they are talking about.

Here are some fun stats from the book:

  • The consensus of economists has completely failed to predict any of the last four recessions (even once we were in them)
  • When an analyst first makes a forecast for a company’s earnings two years prior to the actual event, they are on average wrong by 94%
    • At a 12-month time horizon, they are wrong by 45%
  • When looking at five-year growth forecasts, the stocks analysts expect to grow the fastest actually grow no faster than stocks they expect to grow the slowest
  • In 2008, analysts forecasted a 24% price gain, yet stocks fell 40%
  • Between 2000 and 2008, analysts hadn’t even managed to get the direction of change in prices right in four out of nine years

Investing is clearly filled with a lot of uncertainty and randomness. Independent thinking is incredibly important.

Rather than spew out bullheaded recommendations (no one should ever be overly confident about any investment), I do my best to present balanced, objective analysis in my company research to help investors save time and make better informed decisions.

I strongly encourage everyone to reach their own conclusions and ultimately own their decision-making process.

It is human nature to choose the path of least resistance and externalize decisions filled with uncertainty (i.e. investing) to self-proclaimed “experts” who make us feel comfortable.

More often than not, however, this is simply a false blanket of security (and often a very expensive one).

Blindly buying from some guru’s list of best stocks or trading on an idea you heard from your neighbor without doing any of your own diligence is highly irresponsible.

Research tools and data are widely available and affordable today. Use these sources of information to form your own opinion on the quality of a company and whether or not it appears to be reasonably priced.

Spend enough time upfront to decide if this is a company that you would be happy to commit your hard-earned capital to for the next decade.

If you are unwilling or unable to commit a reasonable amount of time to research a stock, dividend ETFs could be a better choice.

At the end of the day, the most effective investors realize the importance of thinking on their own and following a process that aligns with their goals – regardless of what the stock “experts” are saying.

3. They play the long game and let market volatility work for them

I get a lot of emails from folks who have been sitting on the sidelines for the last few years and want to earn a return on their cash.

However, they worry about the market’s current level and don’t want to risk their capital if a bear market is around the corner.

New money should only be invested when high quality, reasonably priced investment opportunities are available, in my view.

Just because the stock market appears to be somewhat overvalued relative to historical standards doesn’t mean there aren’t any attractive stocks in the market.

Repeatedly trying to time the market is a stressful game to play and has been proven to be more harmful than helpful to investors’ performance (and psyche).

Instead, it’s better to continue scouring for value and commit to a buy-and-hold strategy from the beginning.

While Warren Buffett’s cash position does rise and fall based on market conditions,

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