Why Dividend Growth Investment: Presentation at the Norwegian School of Economics

This week I held a presentation about Dividend Growth Investment at the Norwegian School of Economics (NHH). Since I  know that many of my readers are still in the beginning of their investment career, I’d like to share my slides with you guys!

So I’ve been investing since around 2010. Like many others, I struggled a bit finding my way at first, switching between trading, speculation, long-term investment that turns to speculating, index which turns into speculating and so on. It took about 4-5 years before I understood that dividend investing was my thing, and even further a year before I understood that I wanted to do the “Dividend Growth strategy”

I’ve been fortunate enough to get more and more readers. Something that I highly believe in is that quality matters. This is why you don´t see me writing blog post every day, or maybe not even every week. If I don’t feel that I have something to say, I don´t.

Mark twain has a pretty cool quote about this:

“It’s better to keep your mouth shut and appear stupid than open it and remove all doubt”

 

Compound interest

As dividend Growth Investors, it’s essential that you understand the effect of compound interest. If you don’t, there is no way to stay long term and you will fail at holding your companies for a long time.

What I like to do is to try to thing like a business owner. What this means is that there isn’t necessarily a strong correlation (=1 or close) to how the stock price move and how the company is doing. In the long-term the stock price should follow the company, but in the short-term, this doesn’t have to be the case.

Real Effect of Compound Interest

The slide above is a illustration of Warren Buffet’s net worth and you can see that in the beginning, it barely moved. Most of his fortune is made in his 70’s and 80’s. Of course, some might say that “what’s the point of having so much money when your old?”. Yes, I get that. The point of this illustration is to show you the effect of compound interest. It’s up to you to choose how you want to spend your money and at what time to do so.

 

Dividend Growth

What this table shows it the effect of CAGR (compounded annual growth rate). If you start of by about $850 in annual income, and you hold that for income for 10 years while getting a 10% CAGR, you will get $2292 in annual income. Pretty nice right?

The importance of using Total Return


I’ve stressed this before, but I will do this again. As dividend investors, we should focus on total return and not just price return. Why? Well, in reality, you can have a stock that has no change in price in a whole year, giving 0 %price return. But, when using total return, you see that you have actually earned 5 %, not 0%. I would suggest that you find a way to track your total return ASAP.


Dividend Growth Stock VS High Yield Stock

The slide above shows us the difference between a high yield stock and a DGI stock. HRL is a very nice DGI stock, but has a pretty low yield. SO on the other hand has a pretty high yield but low growth. We can see that in year 15, the compounded returns are even. We also notice that after year 15, HRL really takes of and the returns are amazing. By comparing SO and HRL we see that fater 30 years, HRL has returned 1000 % more than SO.

However, the numbers presented are very unsure because we are talking 30 years head and a lot can happen then. Having 15 % CAGR for 30 years would be amazing, but who knows? The point is that you can see the effect of DGI.

 

People often ask me how I find stocks, so I thought I should share some thoughts. First, most of the companies that I´m interested are presented in my Watchlist World

Also, these are some of the criteria that I use. (I do more, and I also try to calculate fair value based on different valuation methods, but this is my framework)

About the MOATs

  • Brand
    • Apple can charge 15% higher prices that their peers because of a strong Brand MOAT
  • Switching Costs
    • If you run a company, changing the software from Excel or Word to something else would be so bothersome that you just keep the same software.
  • Establishing Costs
    • Say that you want to enter the norwegian food market. Competing against the big chains is very though, and most likely, you will fail due to higher marginal cost.

REITs

As most of you know, I love REITs. If you don´t know what a REIT is, I suggest you read my post about REITs here:

What are REITs?

 

Recommendations

Every presentions about stocks should include some kind of recommendation.  You should know about these companies, but don’t read this as a buy rec. It’s just information about two great companies.

Now that you have an idea about my strategy, it’s time to figure out my goals for my investments. It’s not just about money! It’s about Financial Independence

15 comments

  1. Veldig bra, A.P.

    Jeg tror absolutt du kan gjøre denne presentasjonen på en investorkveld hos Nordnet.

    Vi er jo begge veldig interesserte i DGI, og mener at dette er veien å gå (for egen del, iallfall). Men hva sier du til de som er motstandere av DGI? Jeg prøver ofte å finne slike anti-innlegg, for på den måten å teste min egen strategi/oppfatning.

    F.eks. hadde Tom og Thomas Nielsen et slikt innlegg i siste pengepodden: “5 myter om utbytte…”.

    Kunne du tenkt deg å høre dette innslaget og komme med dine betraktninger etterpå?

    Jeg synes det er veldig kult at en som har bakgrunn/utdannelse fra trading o.l., har gått over til DGI.

    Snakkes!

    1. Hi Kigen

      (I´ll write in english so that my other readers can see my answer)

      Holding a presentation at the investor evening for Nordnet would surerly be interesting. Thanks for suggesting that.

      I´ll listen to the podcast. Funny enough, I made a deal with my professor in Trading. If I held this presentation, he would tell me his research on dividend stocks. I´m planning to write a blog post about his findings, but I can tell you that being a “naive investor”, meaning that you put the same amount of money into all of your holdings, significantly underperforms several other strategies. (Isn´t that your strategy?)

      But yeah, you will find more information about it on my next blog post.

      Thanks for commenting!

      1. Looks like an interesting presentation. I bet you are a great student at this class! 🙂

        May I ask which subject and at what year this is? Being a newly graduate from NHH myself I’m quite curious if I’ve taken this class.
        The Beta Post recently posted…Why I use gearingMy Profile

  2. Dividend works, but primarily because it offers a tilt towards value stocks. Listen to the latest Meb Faber podcast, where he talks about it in detail.

    1. Hi NLcm,

      Not sure what you mean by “tilt towards value stocks”. I´d say we have enough research on dividend investing to say that it´s a good approach towards investing.

    1. Hi Evan,

      Well, I can say that it´s quite hard to use the knowledge that you get into something that actually creates value in the real world. Yes, you understand stuff, but even though you have the theory, I suppose it´s the experience that´s lacking. Though, hard to say why financial people makes silly new beginners mistakes over and over.

    1. Hi Mr. Robot,

      Glad you liked it. The battle between high yield and high growth is always difficult. Next weel I´ll present some research on relativ dividends which might be the answer. Thanks for commenting!

  3. Hi Stockles,

    thanks for sharing this article and presentation – great piece of work! It shows what DividendGrowth Investing is all about. I’m in my year 2 of my journey towards FI and happy that i found a strategy that fits to me.
    I like REITs a lot too, especially Realty Income and Welltower, the ones you mentioned. I plan on adding both to my positions, maybe sooner than later. After my vacations last month i’m back into saving mode for investments. If you have the time you can check out my halftime report (trip to NYC) or my new recent buy.https://dividendsolutions.wordpress.com

    Cheers,
    DividendSolutions

    1. Hi DividendSolutions,

      Glad that you liked it, and also glad that you found DGI as your way of reaching FI. It´s a great platform where you learn just as much about yourself as you do on investing.

      Yes, HCN around $60 would be nice, and O with a yield around 5%. Checking your post right now, Thanks for commenting =)

  4. Well done and very nice presentation!

    There is one problem though, what if most people quit their jobs and retire early? Who is going to work for companies that pay us dividends? 🙂

    On the other hand, dividend investing requires substantial amounts of patience, discipline, and frugal mentality which not everyone has, so we may be okay after all.

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