In Get Rich with Dividends: A Proven System for Earning Double-Digit Returns (second edition, Wiley, 2015) Marc Lichtenfeld, chief income strategist of the Oxford Club, lays out a plan to consistently achieve above average returns. He calls it the 10-11-12 system because it is designed to achieve an 11% yield and a 10-year average total return of 12% in 10 years. To accomplish this, the investor needs a 4.7% starting yield, a 10% dividend growth, and a market that performs as it has historically.
Lichtenfeld provides a step-by-step guide to constructing a winning dividend portfolio. Since his guide doesn’t lend itself to brief summary, I’ll focus on two points: (1) the historical performance of stocks that raise their dividends and (2) buybacks versus dividends.
According to Ned Davis Research, assuming an initial investment of $100, between 1972 and 2010 dividend cutters were worth $82 (a compound annual growth rate of -0.52%), companies that didn’t pay a dividend were worth $194 (1.76%), companies that paid a dividend but kept it flat were worth $1,610 (7.59%), and dividend raisers were worth $3,545 (9.84%). The author’s system would turn the initial $100 investment into nearly $7,500 over the same period.
Chris Hohn the founder and manager of TCI Fund Management was the star speaker at this year's London Value Investor Conference, which took place on May 19th. The investor has earned himself a reputation for being one of the world's most successful hedge fund managers over the past few decades. TCI, which stands for The Read More
As for the performance of stocks versus high-yield bonds, historically, stocks have “a greater chance of suffering a loss, but only by 3%. To compensate for the risk, stocks generate 92% in extra return. …[I]n the past, you’ve had a 9% chance of losing 27% of your money over 10 years investing in stocks or a 6% chance of losing 40% of your money investing in high-yield bonds.” (p. 49) Dividend stocks, the author concludes, are a better investment than junk bonds.
When companies have excess cash, they can pay a dividend, buy back stock, make an acquisition, or simply horde the money. Which is better for the investor—a dividend or a stock buyback? Not surprisingly, Lichtenfeld comes down in favor of dividends.
A stock buyback does not require a company to repurchase the amount of stock it announces in its stock repurchase authorization. But when it does buy back its own shares, it decreases the share count and thereby increases the earnings per share. So when a company announces a stock buyback, it normally sees a pop in its stock price, even if its profits don’t move at all. “It’s simply an accounting trick that doesn’t reflect any change in the business.” (p. 60)
By contrast, “when a company pays a dividend, that’s real. It’s not part of an authorization plan that may or may not be executed. … A dividend declaration is like a vote of confidence by management not only affirming that there will be enough cash to pay the dividend and run the business but also stating that it has set an expectation for a certain level of earnings and cash flow.” As a 2007 study concluded, “share repurchases are associated with temporary components of earnings, whereas dividends are not.” Or, as another study found, “dividends are paid by firms with higher ‘permanent’ operating cash flows.” (pp. 60, 61)
Investing in dividend-paying stocks is a sound strategy for those who seek income or, if they have time on their side, who want to reap the wondrous rewards of compound interest. Long-term investors will find an abundance of valuable, actionable advice in Get Rich with Dividends. It’s definitely worth a read.