PODCAST 183

Safe Dividend Investing

Greetings to listeners all around the world. Welcome to Safe Dividend Investing’s Podcast # 183, on August 29 of 2024.  

My name is Ian Duncan MacDonald. In today’s podcast, I will be answering one interesting investment question. 

The objective of my books, my website and my podcasts are to show all those seeking financial independence how to become informed, confident, successful, self-directed investors.

QUESTION #1

IS TIME AN INVESTORS FRIEND?

My first job after I graduated from university was as a commercial credit reporter with a large international company that had been established in 1848 called Dun & Bradsteet. It is better known as D & B. 

My job here was “killing tickets”. Tickets were requests for information received from companies all over the world. The enquirers were manufacturers, wholesalers and financial institutions, needing to judge the risk of granting credit to companies. 

My job was to quickly gather enough useful information on a company that an enquirer could make a decision as to whether to establish a business relationship with a prospective customer or not. Each day I was sent out to visit eleven companies. The fundamental information that I was always required to obtain was what did the company do, how many employees did they have and o how many years the company had been in business.

It soon became obvious why the age of the business was important. I soon observed that few companies managed to survive for five years. Many failed to survive their first year. Although it is not noticeable about 20% of all businesses cease operating each year and are replaced by an equal number of new businesses.

Operating a business is not easy. It takes persistence and great effort to generate enough sales to cover business expenses. You could have the best product in the world but if you are unable to convince prospective customers to spend their money to buy it your business will fail. The need for your product may have been fulfilled by a competitive supplier for decades. Unless you can make a potential customer aware of your better features, benefits and much lower prices your business will disappear.

The day you open your doors for business the clock is running. The initial start-up money you invested in the business is limited. When it runs out and you cannot find lenders willing to finance your business, the game is over.

 What did my experience as a commercial credit reporter teach me about investing? One big lesson I learned was that investing in an Initial Placement Order for a new stock that does not have an established product or clientele is a dangerous gamble. There are many established financially strong companies listed on stock exchanges. There is no need to gamble on new businesses.

How do you determine whether a company is financially strong and well established? You determine how long they have been operating and how profitable they are. The profit is proof that their sales are exceeding their expenses. 

The quickest way to determine if a company is profitable is to only invest in companies that pay dividends because dividends almost always are paid out of profits. For safety you do not want to invest in a company who is paying a dividend for the first time. You want to invest in companies who have paid dividends for decades. 

There are charts easily found on the internet that show dividend payouts for for fifty years or more. A company that has been paying dividends every year for decades is highly unlikely to suddenly stop paying dividends this year. However, just in case such an unlikely thing should occur you invest in twenty companies who have paid dividends for ten years of more. If one or two of these high dividend companies should ever cease paying  dividends there would be a minimal impact upon your total portfolio. 

There are so many dividend payers to choose from that it is possible to select only companies paying a dividend yield percent of 6% or more who have been steadily increasing those dividends over the last ten years. 

In writing my D&B risk reports I was always required to ask for the company’s annual sales volume and how it compared to previous years. The fundamental belief was that a company whose sales are not growing is dieing. If inflation on average is 3.5% annually and your sales are stagnant then your business is in trouble if you cannot cut your expenses to maintain your profit margin.

Before asking for sales figures, I would have asked for a copy of the business’ audited financial statements. I rarely received them. Companies are very reluctant to release this confidential information. This meant I had to rely on what the chief executive of the company told me his sales were. 

Since I had initially asked how many the business employed and what the company did, it was not difficult to determine to determine if the executive’s stated sales figures made sense of not when compared to other companies of the same size in the same industry.

 While very few of the companies I wrote reports on were public companies traded on stock exchanges, every stock you will buy is a public company. There are approximately twenty-five million businesses in North America. Of these there are supposedly only about sixteen thousand traded on various stock exchanges. All businesses trade on stock exchanges must provide frequently audited financial information on their company available to the public. Thus, there is no excuse for any investor to buy any stock blindly without accessing this easily available financial information.

If you cannot measure an investment’s strength before buying it then do not invest in it. Let someone else blindly gamble on what they are investing in.

Since I rarely saw a financial statement, I had to depend on other information to determine if a company was financially strong or not. For example, I would contact the companies who sold that company on credit. If these credit references reported that they had dealt with the company for years and that all their bills were paid promptly this would help confirm that the company’s was generating enough sales to offset their costs and show the profit they claimed. 

However, if they reported that the company was very slow in paying their bills then this could indicate a problem. I had learned that while most companies were given 30 days to pay their bills that on average bills, they paid bills at 52 days. Many suppliers would wait 90 days for payment before they would consider placing it with a third-party collection agency or sue the debtor to get paid.  

Collection agencies were expensive. They would generally charge a 30% commission for collecting delinquent amounts. This would most likely be more than the company’s profit on a sale.

A good agency might be able to collect accounts placed with them about 60% of the time. Companies they were unable to collect from were usually limited companies out of business without seizible assets which made suing such a company a wasted effort. 

It is difficult to fake having money. Either you have it or you do not. If a company is in financial trouble, there will be signs telling you to stay away from them. Companies do not go from being strong today and out of business tomorrow. Their death is usually slow and prolonged like a car tire with a slow leak rather than a blowout.

I always advise investors before they buy any stock to always do a Google search with the stock’s name followed by the words “legals and complaints”. You may be surprised and what you may learn. Do not assume that a company is financially strong just because they are large and well known. 

Life is too short to gamble on a stock that is in financial difficulty. You do not want to be the last person to find out. It takes just a few minutes to do this Google search.

You will notice that I have supplied no strategies for identifying stocks that are sure to double their share value in the next month. This does not mean that you will not add to your portfolio stocks that will double in value. It does not happen quickly. Such stocks grow over several years. 

Those stocks I owned whose share price doubled were allpaying a high dividend. The interesting thing I have noticed is that the share prices of financially strong companies who pay high dividends not only have ever increasing dividend payouts, but their share prices also steadily increase. Not as fast as their dividend payouts increase but they do increase. The only exception would be market crash years where almost all share prices can drop temporarily by as much as fifty percent. However, their high dividends do not drop. They either remain steady or increase.

If you are reinvesting your dividends back into the 20 stocks in your portfolio, the market crash years can be good years. These are the years when you can buy shares in your 20 strong high dividend companies at bargain prices. 

The drop in share price in a market crash has often little to do with the financial strength of the company. The drop is caused by speculators convinced that the sky is falling, and they are about to lose all their own money – despite every indication being that the stock is as strong as ever. 

These speculators are moved by negative media hype to sell and revert to cash instead of just waiting it out. Those with limited financial resources must sell their shares at discounted prices to generate enough cash to live on. However, the high dividend investors just live off their dividends as they always have. Nothing has changed for them.

Once you have passed through one market crash living on your dividend income, the next crash becomes just a ho hum event. They are going to come around every four to five years and devastate speculators.

Investing in strong dividend stocks means that you can go for years without selling a stock. Thus, you will incur no capital gain taxes, and your dividend income is taxed lightly. Your portfolio and your dividend income will increase steadily. 

It is not usual for the share prices of these strong dividend companies to increase by 10% to 13%. It is also not unusual to achieve an additional dividend income of 6% to 8%. Thus, in those years when you may be reinvesting your dividend income each year back into your 20 stocks you will see a compounding effect as the dividend increases the value of your portfolio which in turn further increases your dividend income. It is not unusual to see such a portfolio to double in value within 5 years and grow at an even faster pace after that. Thus, the earlier in your lifetime you establish a strong dividend portfolio the better. 

Of course, achieving financial independence is not all about investment income. The other reality is that your expenses must be carefully controlled. In all my investment books there is always a chapter with hints on carefully controlling your money flow.

For example, it is possible to buy a car a year old with a few thousand miles on it and still under warranty for $15,000 to $20,000 less than buying it new. Yes, you must look for them and be willing to pay cash out of your accumulation of capital. 

Your strong, dividend portfolio is like an insurance policy that you may never need to liquidate. It is always there, constantly growing and producing income. All or part of it can be liquidated in a day or two if you should ever have a desperate need for a large cash outlay. There are few other investments that have the same flexibility and potential. With such a portfolio time is definitely an investor’s friend.

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