Wednesday, June 22, 2011

Overview of the strengths of Dividend Investing

As I have mentioned before, dividend investing takes a different mindset to use as a core pillar of a strategy. At first glance it appears to have weaknesses. To find its strengths you have to yank out the calculator...

EDIT: At the time this blog entry was posted I had a Youtube video here. That has been removed but I want the rest of my content to be remain. Nothing hidden no past mistakes ignored. All out in the open.

I threw out a lot of numbers in the video so I want to expand upon it more here.
For my March 2002 purchase I took the close price just before that dividends ex-dividend date. For each compounding of the DRIP I took the close price of the payout date.

How does the stock-split math work with the $14.47 price I mentioned?
February 1995: The actual share price back then was $57.88. However JNJ split the stock 2:1. Meaning you know own 2 shares for every 1 share pre-split. They did that twice, once in 1996 and then again in 2001. When a company splits like this where they double the number of shares the price per share is halved. This is to keep the actual total wealth per investor the same. That $57.88 for 1 share turned into $28.94 for 2 shares. If the price didn't get halved it would double the value of the company automatically. Share price is a measure of the value of the company. JNJ didn't double their sales or double their factories.

Since they had another split for 2:1 we would half the price again which is where we get the $14.47 price. Every 1 share today had the equivalent dollar value back in 1995 of $14.47. You pretty much have to do this because what if you want to compare how 3 current shares did back in 1995? Its gets messy.

Further comparison to the 10 year bond
The video was starting to get pretty long so I cut out the following part but I really want to talk about it
In 2002 we bought are 4 shares of JNJ for $289 (excluding commissions). Back in 2002 according to the Federal Reserve Historical Stats a 10 year US Treasury had a yield of 4.6%.
The following is how much money every year we will get paid by each
JNJ stock : $1.64, $3.76, $4.54, $6.28, $7.18, $8.17, $9.04, $10.21. $11.28 (2011 estimated)
Total: $62 total paid.
10y US Treasury $300 @ 4.6%: $13.8, $13.8, $13.8, $13.8, $13.8, $13.8, $13.8, $13.8, $13.8:
Total: $138

Keep in mind that in 2002 JNJ had a yield of 1.3% so though its catching up to the 10 year bond's 4.6% yield in those last couple of years it couldn't overtake it.
By the end of 2011 the bond expires. We have our money back but no more income. We have to go buy another one. As of right now the yield is 2.95% so we lost some yield there.
Now that $300 is only going to get us $8.85 per year. One could take all of bond income and buy a bigger bond. A $438 bond @ 2.95% makes $12.92/year
JNJ? We were not forced to sell so we are still making out $11.28/year which will continue to DRIP for more shares and continue to get their payout raise per share. It will quickly overtake our bond.
I didnt drip in the bond payments because you cannot. The US government doesn't allow it as far as I know. One would either have to buy into an ETF that allows it or wait and save up their bond income to buy a second one.

So when I say its hard to see the strengths of dividend investing it really can be. Keep in mind that this was from the absolute worst time to be buying JNJ. If I were to use the 1995 example? Things get real juicy but I think you can see where it ends up at.

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