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Cliff Wachtel's avatar

Author neglects critical point. Stock markets are historically cyclical ie there are BOTH bull and bear markets, and those down bear markets can last years, and it can take more years to recover. Took markets about 6-7 years to recover from peaks in 2000 and 2007, in both cases they peaked at 1500. In other words, without dividends, stocks were overall dead money from 2000-2013, with a typical retail investor losing $ because they tend to buy near market peaks and sell near market bottoms. Given the strong likelihood of our entering a multi-year bear market, no reason to own a stock unless dividend cash flow justifies it, at least to provide some cash flow and limit the loss. Consider.

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P K's avatar

Thank you for this wonderful piece, and I apologize for the late reply.

Right from the start of my investing journey, I made up my mind to build a portfolio of a dozen or so blue-chip dividend paying stocks, purchased at discounts to their intrinsic values. The sole purpose of this strategy was (and remains) to gradually replace my employment income with the steady cash flow of the dividends received. This strategy also included paying off my mortgage as soon as possible and staying debt free for the rest of my life. It’s been 13 years since I bought my first shares, and I am quite content with the results.

Throughout the history of mankind, a person who owned land, a craft shop or other income producing property would be able to meet his living expenses and needs. Most likely, such an individual would care little about the “market value” of his asset. Of course, this person could sell his asset and receive a good price for it. However, he would then need to find and buy another asset in order to replace his source of income. Only in recent years (perhaps the last 30 years) investors, or, should I rather say speculators, have had their attention pinned exclusively to price and price appreciation.

A comparison can be drawn between the above-mentioned farm or shop and a well-constructed portfolio of blue-chip dividend paying stocks. The dividend income would keep coming and even growing, thus providing a reliable substitute for the employment income of the portfolio’s owner. On top of that, the portfolio’s market value would increase and provide a nice total return.

The issue with taxes is of no concern to me. Here in Canada, we have a product called Tax Free Savings Account, which is similar to the American Roth IRA. Because it is funded with after tax contributions, all capital gains and income that can be generated in it, are subject to no taxation. They even don’t get declared on our tax returns. The drawback is that, in the TFSA, dividends from American companies get a mandatory 10% tax imposed by the IRS and not the CRA. Therefore, I keep my American holdings in my RRSP account, which is equivalent to the American 401K.

I have never been a high yield chaser. Generally, I don’t like to own companies with a payout ratio of more than 75%. If a company gets too expensive, I may either sell it, or write an “out of the money” call option to get additional income out of it. As a matter a fact, I use the covered call and naked put writing strategies on a regular basis as a way to boost my yield on cost. If the fundamentals of the company deteriorate, I sell it and move on to greener pastures.

Finally, I want to say that my strategy is not cast into stone. I am always open to new ideas and try to reign my expectations as an investor. In the future, my primary goal will remain income, not capital gains. Please, don’t get me wrong- I don’t mind building a multimillion-dollar portfolio. It’s just that price is of no importance if I am not planning to sell my holdings.

Happy holidays and best wishes for a happy and prosperous New year!

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