Monster Dividend Investing: Dividends Don’t Lie (Issue 2)

This article was first published on my Monster Dividends LinkedIn Newsletter -- Grow Your Monster Dividends Issue 2

This article was first published on my Monster Dividends LinkedIn Newsletter — Grow Your Monster Dividends Issue 2

Welcome 1,720 subscribers to my weekly dose of Monster Dividends

Hey Willie here!

I’ve recently shared building my smaller portfolio from scratch, dedicated to a dividend growth strategy.

So far, this portfolio is up 23.7%, driven by consumer, tech and financial stocks. Portfolio value stands at $85,500. It grew because I pumped more capital.

First things first, dividend growth investing is picking high-quality dividend payers. But more importantly, I have to regularly put in more money to “feed the machine”. This means, you want to set aside part of your salary (or active income) to grow the portfolio’s capital.

I’ve said earlier in my first Monster Dividends newsletter: “If you’d invest your extra savings of $1k per month ($12k per year) at that same average returns, it’s going to compound your capital much harder – $754,575 at the end of 20 years.”

A Biggest Position (and Problem)

My largest position is Taiwan Semiconductor Manufacturing (NYSE: TSM).

Because shares have gone up in recent months, it’s now my biggest position (and problem).

At the start, I may have “lumpy” concentrations in a certain stock or sector. It’s normal. It’s hard to control diversification early, since you’re first buying into a handful of stocks.

This portfolio might underperform the broader S&P 500, since I’m underweight tech stocks. And S&P 500 is massively overweight on tech (40% of 500 stocks in tech) right now.

But in the long-term, I plan to diversify across different stocks, sectors and country markets. That’s where the true power of a dividend growth portfolio comes.

Why TSM?

Now, TSM is a strong dividend grower. Shares didn’t soar as much as other tech giants, but it had a modest gains since the start of this year.

TSM dominates a niche as a “pure-play” foundry. This means, it does nothing but produce the smallest microchips for some of the world’s biggest tech giants – Apple, Qualcomm and even Intel buy chips from TSM.

And because TSM is way ahead of its peers in producing chips, both Intel and Samsung have trouble competing with TSM.

Over the last ten years, dividends tripled. In fact, its dividends grew from 14 cents per share to 42 cents per share.

If it continues to grow dividends at this rate, my dividend yield on purchase cost should continue to compound.

You see, when we pick companies like TSM, the best thing to do is a Rip Van Winkle moment

  1. Put it in our portfolio
  2. Sleep over it for the next 20 years
  3. Don’t get bothered by unnecessary news

Dividends Don’t Lie

Now, I’ll tell you what dividend growth investing is not. It’s not buying growth stocks.

Put it this way, when you buy growth stocks, you bet on a company that will be the next disruptor. For instance, you might pick fast-growing businesses with massive revenue growth, growing market share, but not making any profits.

In other words, no cash flow. No proven business model.

Okay – there’s nothing wrong with betting on growth companies. But I know I don’t have that expert knowledge to pick these early-stage companies.

But Willie, what if you missed the next Amazon, or even the next Facebook?

Sure, I could miss out on the next big thing, or the next Facebook at their early stage.

But for every winner like Facebook, there are thousands of other failed companies. How often can I successfully pick these winners? I don’t know. While these companies can potentially disrupt markets, they are vulnerable to market disruptions early on too.

What’s more, investing this way means I need to own at least a hundred of these stocks to diversify my risks. That’s too much time to watch my investments. For example, Unity Software – best known for its game engine to create video games – fell over 70% over the last three years.

Dividend growth investing is different.

In a 1999 Fortune article, Warren Buffett said:

“The key to investing is not assessing how much an industry is going to affect society (in my own words, disruption), or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.”

In my view, I find it’s far easier to pick a company that’s well-established, has a durable economic moat, making predictable profits, rather than try to guess a company that will attempt to disrupt the market.

I focus on a steady accumulation of dividends year after year.

I want my dividends to grow, and reinvest those dividends to compound my returns. Along the way, these durable businesses that pay dividends will also grow in capital gains:

Dividend growth investing focuses on:

  1. Dividends grow + reinvesting
  2. Share price gains

While picking growth stocks is trying to figure out the next multi-bagger, I prefer compounding my returns over the long-term.

Naval Ravikant said: “All the benefits in life come from compound interest – relationship, money, habits – anything of importance.”

A dividend growth strategy benefits from compounding.

What do you think?

Sometimes, investing can be simple. 

Willie Keng, CFA

Founder, Dividend Titan

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