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Many people believe that the key to success in the stock market is buying low and selling high. But how many investors have the time, talent, and luck to earn consistent returns this way? In The Ultimate Dividend Playbook: Income, Insight, and Independence for Today’s Investor, Josh Peters, editor of the monthly Morningstar DividendInvestor newsletter, shows you why you don’t have to try to beat the market and how you can use dividends to capture the income and growth you seek.
- Sales Rank: #239146 in Books
- Brand: Wiley
- Published on: 2008-01-02
- Ingredients: Example Ingredients
- Original language: English
- Number of items: 1
- Dimensions: 9.30" h x 1.20" w x 6.40" l, 1.23 pounds
- Binding: Hardcover
- 368 pages
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Most helpful customer reviews
289 of 298 people found the following review helpful.
How to get rich, slowly with dividends.
By Clif Purkiser
Let me be upfront, I am a fan of dividend investing in general and Josh's Morningstar Dividend Investor Newsletter in particular. As an early retiree I have been struggling with a way to have enough income to enjoy life, while protecting my nest egg from the ravages of inflation.
I think this is a valuable book for the intermediate or advance investor to own for two reasons. First, while dividend investing has become somewhat trendy in the last couple of years, there hasn't been much in depth analysis of why dividends matter. Secondly, the truly outstanding portion of the Dividend Playbook is it teaches the average investor how to search out and evaluate dividend stocks, and figure out which are likely to be good investments. Overall, the Playbook is the rare business book that does a better job teaching you how to catch fish, than making the case why you should eat fish!
Target Audience.
I think anybody who is a current or potential M* Dividend Investor Newsletter subscriber would be crazy not to buy this book, it is a fraction of the cost of the newsletter, and makes the newsletter much more valuable. I'd also commend it to any do it yourself stock picker. I think it would be valuable people looking at purchasing dividend ETF like DVY or mutual funds. A beginning investor who isn't really comfortable with terms like Return on Equity, or an index fund investor, or 401K investor doesn't really need it.
Why dividends?
Josh quickly nailed my biggest problem as a retiree depending on an equity heavy (80%) investor. It is awfully hard to figure out when to buy a stock and even harder to know when to sell. I think even for a pure index fund investor with a 50% stock/bond mix who is rebalancing his portfolio in Jan 2008, must be uneasy with recent market volatility. I am sure many ask themselves, do I really want to buy more stocks? They have gone down a lot in the last couple of months. For the individual stock investor figuring out which stocks are overpriced and what is underpriced is way to much work. According to Josh, the beauty of the dividend income approach is by relying on income you are letting the stock do the work for you. As long as the companies keep paying dividends and they continue to grow there is no need to worry about how manic depressive Mr. Market feels about your stocks today or tomorrow.
The first few of chapters make the case for dividend investing being superior. I was most interested in Professor Jeremy Siegel (of Stocks for the Long Run fame) study of the top 100 highest yielding stocks in the S&P 500 earning an average of 14.3% annually while the lowest 100 yielding making only 9.5% annually between 1958 and 2003. Several other shorter term (10-25 years) studies were also cited showing the superiority of dividend investing. One of my main criticism of the book, is I don't think nearly enough time was devoted (only few pages out of 335) to bolstering Josh's claim "There's no good reason an investor needs to own any non dividend paying stock at all". Not only would Google shareholders disagree but so would Berkshire Hathaway shareholders. I'd love to see a great deal of more effort to examining historical studies of dividend investing.
His philosophical case for why dividends are good for shareholders is quite strong. Imagine a company which makes $200 million in profit. It can reinvest $100 million in it is core business which has historically earn 20% on equity, there is also a $100 million opportunity to acquire another business which if all goes well may earn 15%, In the absence of dividends, both projects are likely to be funded. As we all know the number of can't miss acquisitions which have flopped is huge. If on the other hand, the company has historically paid out $100 million in dividends management is likely to pass on the risky acquisitions. One particularly interesting insight was the case against share paybacks. All too often management announces buybacks but don't follow through, even more troubling is share buybacks award EX shareholders not the existing loyal shareholders. If management want to keep stable base of shareholder dividends are a much better approach.
The Dividend Drill
The meat of the book is in Mr. Peter approach to evaluating dividend stocks which he calls the Dividend Drill. The drill is familiar to his newsletter readers, but I never completely understood it until reading the book. The simplest part is the insight that the total return of a stock is equal to the current dividend yield + dividend growth rate. Thus a stock currently yields 4% and has been growing dividends at 6% in the past and is likely to do so in the future its long term total return is 6%+4%=10%. Johnson and Johnson is a classic example with a yield which has been around 2% for most of the last 30 years, but with a dividend growth rate of 14%. The total return on JNJ including reinvesting dividends has been 16% over a 30 year period. Many other stocks have shown strong correlation between dividend yield+growth and total return; examples include Utilities like Con Ed with 5.5% yield and 1% growth rate and Realty Income (O) with a 7% yield and 3.7% div growth rate.
The crux of the dividend drill is evaluating a dividend stock on three critical elements; is the dividend safe, can the dividend grow, and what's the return? There is high school level math involved and balance sheet 101 knowledge is definitely needed (I have an MBA so I pass!), however it isn't very complex. Mr. Peters does a good job of providing concrete examples and nice step by step explanation.
Dividend safety is a relatively simple calculation; do the projected earnings exceed next year's dividend by a comfortable margin? Josh explains that the safety margins (aka payout ratio) for a cyclical industry need to be considerable higher than a natural gas pipeline company. Will it grow is probably the most difficult calculation to make. There are numerous things to consider, management's commitment to growing dividends, the core potential growth rate, obviously microchip companies have a higher potential growth rate than potato chips companies, and small companies better potential than large companies. Future earnings growth and return on equity are also factors.
Josh then discusses how to calculate total return and emphasis the importance of setting hurdles. In general Josh finds a sweet stock with stocks yielding between 4-7%. Stocks yielding above say 9% are at risk of having a dividend cut, stocks yielding 2% or below require very high growth rates. This sweet spot is important to retirees because a 4% Safe Withdrawal Rate requires growth at the rate of inflation. If Mr. Bear market or Sub prime Scandal comes along and cuts the price of your 4% dividend payer by 25% you can pretty much ride out the market with your income intact. On the other hand, the yields aren't so high that a dividend cut is likely because of dropping earnings. Overall Josh is looking for companies which will provide a total return in the 9-11% only a couple of percent higher than his 8% total return estimate for the overall market going forward. (FYI, pretty much in line with Buffett and others estimates.) Still a 1-2% reliable return over the market translates into a hefty increase in disposal income for a retiree or near retiree.
The final chapters of the books discuss managing a dividend portfolio. He gives some helpful advice about picking a target income need and designing a portfolio around that. Not surprisingly the portfolio construction is very similar to the M* dividend investor newsletter portfolio. The lack of diversification (e.g. heavy emphasis on financial) could be worrisome to some investor. However, there is something to be said about Mr. Peters, Warren Buffett, and Marty Whitman, argument that it is better to own 10 stocks you know than 500 you don't know. One of my other criticisms of the book is that the all important discussion of when to sell is definitely glossed over.
Some of the most valuable section of the books is the 6 appendixes, which discuss the mechanism of dividend payments, tax treatments, and investing in Utilities, Master Limited Partnerships (MLPs), REITs, and Bank Stocks, respectively. The last three areas are particularly good places to look to find high yielding dividend stocks. However, they require an additional approach to evaluating the potential returns. I was particular pleased with these appendix, because having learned the basics of fishing, it is very helpful to learn the tricks involved in fly fish, ocean fishing, and bass fishing, because the more you know the less chance you have of going hungry!
Overall, I am much more confident about investing in dividend stocks thanks to this book. I intend to continue to emphasis individual dividend stocks, for the non-index portion of my portfolio.
169 of 182 people found the following review helpful.
Hindsight is 20/20
By Munir F. Bhatti
Although published in 2008, the content in this book (judging by the included information in the text, tables and charts) was authored through 2006. In 2006 and 2007 the markets rose. In 2008, it plateaued and--later that year--it fell off a cliff as we entered the worst worldwide economic downturn in 70 years. As of 2010, the market has recovered a great deal but many companies were nonetheless critically damaged or forced into bankruptcy. With the benefit of hindsight, we can examine the central thesis, particular methods, and specific recommendations of this book and see how well they have held up over the past 4 years. Given the severity of the decline, this should indicate how well the ideas and investment methods would hold up in hard times in general, and therefore how dependable this strategy would be for investing.
What is the central thesis? Josh Peters' compelling idea is that one can purchase companies that pay dependable and growing dividends. These dividends should grow faster than inflation, allowing the investor to depend on stable and growing income during retirement. It's an alluring thesis, and one that seemed highly plausible in 2006. However, of the thousands of companies screened and approximately 26 selected using the authors sophisticated Dividend Drill Return Model, a fairly high proportion have declined in value 30%, 50%, or even 95% while cutting the dividend in half, decimating the dividend, or eliminating the dividend entirely. To use Mythbusters' terminology, we can safely declare the central thesis--that one should retire on dividend paying companies rather than bonds--busted.
In fact, as I write this in early 2010, retirees who were invested primarily in bonds are the ones with dependable income and intact retirement portfolios that are able to swoop into the market and purchase nice retirement villas in Florida, Arizona, and other retirement havens. Bonds would appear to survive hard times far, far better than dividend paying stocks, both generally and specifically those highlighted in the two portfolios mentioned in the book.
The only exception is the consumer staples stocks that Mr. Peters selected--and, actually, consumer staples in general. This sector didn't decline too much, has mostly recovered, and has kept paying its dividend and raising its dividend along the way. Provided that one rejects the other recommended industries and companies (banks, REITs, energy MLPs, and utilities) and limits oneself to consumer staples, then the thesis appears confirmed for this special case.
This is no small point. The book goes to great lengths to recommend banks, real estate investment trusts, energy master limited partnerships, and utilities as industries from which you can mine gems that will pay dependable and growing dividends. If you actually go and compare the stocks highlighted and recommended in 2006 versus their performance over the next four years and their condition today, the insolvency, losses and dividend cuts are enough to strike fear and cold sober reality into the heart of any investor or retiree.
The fact that so many of the selected companies and their industries tanked, not in the distant future, but in less than 5 years also draws into question the forward-looking power of the Dividend Drill Return Model (DDRM) introduced and discussed prominently throughout the work. Peters places great emphasis of the forward-looking power of the method. Given the utter failure to see huge investment losses and dividend cuts just three and one-half to four years later, however, we must conclude that the model has no meaningful forecasting ability.
Having swallowed these bitter pills, the reader can nonetheless find much of value in the work. Mr. Peters' discussion of how companies decided to pay and raise dividends, the use of the DDRM to determine to what extent share buybacks will be possible, and the discussion of the tax treatment of different types of dividend-paying investments are presentations that are rare in investment literature. He is also to be commended for warning investors that it can be better to take the dividends from a company and reinvest them manually in undervalued issues rather than automatically reinvesting in the company that paid them. In this regard, the book and the appendices are valuable information for those serious about seeking to aggregate wealth via capital gains and dividends.
The book also contains advertisement-like language for Morningstar and the Dividend Investor Newsletter. Since I generally regard Morningstar and Josh Peters favorably, I didn't mind this too much. However, it is a bit annoying. If the methods in the book are wonderful and useful, then people will naturally gravitate to the newsletter and Morningstar and there is no reason to plug it so emphatically.
Finally, to some degree the book tries to be a guide in how to beat the market. This is an old saw for investment books and, in this case, the book is not deep enough nor value-focused enough to succeed in doing this. If you plug in the model portfolios, you will see that this is not an approach that will beat the market or even provide dependable dividends.
We can now rate the book:
Central thesis (retire on dividends): one star (busted)
Modified thesis (restrict oneself to consumer staples): five stars (confirmed)
Forward-looking power of DDRM: two stars (many companies that performed will in the DDRM ended up cutting or eliminating the dividend)
Informative nature of DDRM: four stars (forces you to think about the inner workings of the company)
General information on dividend-paying investments: five stars
A way to beat the market: two stars
An advertisement for Morningstar and DividendInvestor: one star
Overall, I rate the book three stars. I hope that, in the years ahead, Mr. Peters can modify and update this book. In the meantime, I would recommend 'The Future for Investors' by Jeremy Siegel as one that takes the modified thesis and runs with it in a way that is useful for value investors, those seeking dividends, and those seeking amazing investment returns.
59 of 61 people found the following review helpful.
Dividends: Income for Life
By mostserene1
Like Clif, I am an early retiree who relies on dividends for an (in my case, modest) income stream. I disclose this so the reader can place this review in perspective. The thesis of this book coincided with my own investing philosophy, so I anticipated both friendly and familiar ground, but the author argued persuasively the advantages of dividend-paying stock strategy over alternatives, and he provided sufficient detail on the analysis of the dividend aspect of equities to improve my knowledge in this area.
The book's thrust is that you may be better off receiving income via dividends than regularly selling off stocks from your portfolio or relying on fixed income instruments. Moreover, even if you are a long-term investor looking for a modicum of growth and not only immediate income, the author confirms the value-investing maxim that div-payers tend to perform better than non-div stocks over the long term.
And to me perhaps the most convincing construction, also proposed by the book Active Value Investing, is that if you are going to own a stock and that stock's performance is flat or down for relatively long periods of time (say, during range-bound or bear markets), would you not want the stock to pay you for holding it in the meantime?
The author uses a variety of methods to analyze how to select dividend-payers that are likely to continue paying, and increasing, their dividends. He focuses on ROE vice cash flow, and explains why. He also reveals his own portfolio. One nit-pick is the promotion of his newsletter, which is common among investing authors but nonetheless detracts a bit from the point being made.
It is worth noting that this book was put to bed mid-2007, so his fairly unalloyed praise of REITs should be viewed in that context. He does somewhat presciently warn on the risks of bank dividends. Naturally, the principles of dividend investing apply, generally, regardless of the prevailing market condition, and the author also correctly cautions against the tendency to chase the highest dividend yields at any particular time rather than looking at a stock's dividend yield/growth history and other relevant factors.
Many financial advisors and institutions recommend either singly or in combination the fixed income (bonds, annuities) or "sell x% of your stock portfolio each year" method of generating investment income streams. The author offers the dividend-stream approach as an equally viable consideration for the long-term investor.
And finally, what the reader should expect from this book is less a list of what stocks to buy than "here's how to pick solid dividend-paying stocks, and here are the ones I selected."
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