In the book Margin of safety, Seth Klarman cited, “Most investors are primarily oriented toward return, how much they can make, and pay little attention to risk, how much they can lose.” In retrospect, I found this was true. I wonder how often I have made decisions without reckoning. But I now consider them as part of my learning. According to the book author and esteemed value investor, A Risk-averse strategy is the only way to invest. He recommends buying a good company for 50 cents on a dollar, reiterating what Ben Graham and his disciple Warren buffet preached for years. But what is better than that, Buying a good company with 50 cents on the dollar with good dividends.

It’s not counterintuitive to reinforce the idea of a dividend growth strategy. I haven’t focused on dividend growth stocks assuming those are slow-growing and don’t provide the zing to my portfolio, but that turns out to be a thoughtless presumption. I can find tons of material on the Dividend Growth Strategy and how it outperforms the market while limiting the downside. One article that stands out is Hartfordfunds “Power of Dividends.” I found multiple references to this paper in many articles. I recommend reading it, but some things are overlooked and need research to get the holistic picture. Consider the graph below:

It exhibits the discrepancy b/w returns of stocks that paid & grew dividends vs. the S&P equal-weighted index. Equal weight is different from most index funds like VOO & SPY, which are market-cap index funds. The return gap is closed and extended while comparing with market-cap index funds when dividends are reinvested in the market. The S&P market cap index delivered returns at 10.67% CAGR in the same period, which meant the figure would be $12,994, easily beating the dividend growth strategy proposed in the paper.

Dividends contribution towards total returns is highlighted at 41% for all decades. But we know for a fact that dividends play a more significant role in the early years, but since 1990, it has been well below average. In the last two decades, dividends didn’t play an essential role in total returns. Keeping it in mind, The graph showing disparity b/w returns would have made more sense if they had just included the last 25 years of data instead of 50 years.

Does it mean dividend investing is not an acceptable strategy? The owner of site DividendEarners begs to differ (click-here). The original idea of Power of Dividends is true-to-life, and they, without suspicion, play an indispensable role. In the last 25 years, the return of S&P with dividends reinvested would be 10.54% CAGR vs. 8.42% CAGR without dividends. It insinuates, If we carefully select our dividends growth companies and pay 50 cents on the dollars, we can safely whack the market returns without added risk.

I created a simple spreadsheet to comprehend the impact of dividends against my goal of 12% CAGR and the value it brings into my portfolio. It’s evident that a stock expected to grow at 12% and pay a high dividend transcends a stock with no dividends. 4X in 10 years exceeds my goals but may not fit investors looking for quick bucks. In other words, I should be able to meet my goals even If the expected potentials of 12% are not realized, and the company can only grow at 9% but pays a high sustainable dividend yield.

There are several learnings within my portfolio. I think it’s an excellent time to invert and find inklings to evolve at finding stocks. In fact, that is the whole point of this blog. The securities listed below are/were part of my portfolio at some point.

GAZPROM: I started buying Gazprom around $5.50. As this is my relatively recent buy, I did my groundwork and was confident that I was buying the company with 30 cents on the dollar. The dividends were just the margin of safety. Fast forward today – It’s trading up decently, but what is worth mentioning is the 6% realized gains in the form of dividends, exactly half of my goal. The margin of safety was enormous.

CVS: I started buying when the stock was $52 in 2019. I was virtuously fortunate as far as price was concerned because it was rock bottom. It was trading at multiple-year lows because of the botched acquisition of Aetna and loads of debt. I was convinced that business was good as I could see CVS was replacing pharmacies at Target. The dividend of 3.7% was just a margin of safety. Since then, the total return with CVS dividends reinvested yielded 99.13% but 71.69% for the S&P 500.

ABBVIE: I bought Abbvie for around $99 in Jan 2018 and sold it within six months around the same price. It shot up to ~120$ and then receded. I traded with no profit, but I did collect some dividends along the way. I felt burnt at that time and moved on without contemplating my decision. But today, I consider Abbvie the cost of my learning which isn’t that bad. Now, I can revisit and learn from what went wrong. 

• First and foremost, I did not do any homework. I just followed some random guy suggestions to invest in it as the price was going up. 
• Secondly, I didn’t buy the company for cents on the dollar. It was, at best, fairly valued at that time, if not overpriced. 
• The timeframe (6 months) for investment to work was too small.
• The biggest mistake was not to follow the company once it was on the radar. The stock price dipped to $64 and has rebounded around 100% since then with a 4.5% current dividend yield.
• Assuming at 99$ business was fairly valued, I theoretically could have made money on ABBV if I had let it run for longer and averaged it out on its way downhill while collecting dividends all along. In hindsight, everything seems easy (wink wink).

BAYER AG:  My recent buy is Bayer AG, which currently pays a 4.59% dividend yield. The stock is down because of legal issues and a mountain of debt. My theory is that problems are temporary, and the company will come out strong in the next five years. For more details, read my last post here. Only time will tell if my investment will work or not, but I will come back years later for retrospection.

As stated in my previous article, “Oppurtunity Cost – When neighbour is making more money,” my strategy is not to beat the market but to earn a 12% CAGR. A company that pays a dividend gives me a better margin of safety. If the company’s potential is realized, I will make much more than expected; if not, my downside is limited and covered with income from dividends. My plan is not to become a dividend growth investor but instead use them for a Margin of safety. Limit my downside with a regular realized sustainable income.

This article is my attempt to reinforce the idea of the Power of Dividends to my subconscious mind. And if it benefits you, Then it is just the cherry on top. See you soon with new opinions and wisdom until then – Namaste.

Disclaimer: Stocks discussed here are only for educational purposes and not a recommendation. Please do your research before investing.