- The hunt for dazzling dividends can blind you from opportunities to own truly exceptional businesses.
- Why not focus on improving the business quality of my portfolio companies, even if that means foregoing dividend income and trading low PE ratio stocks for high PE ratio stocks?
- I am carving back exposure to OHI and WPC to allocate more capital to LVMUY, V, MSFT, CSX and PEP.
It is a lovely day outside in Lisbon today. Brilliant sunshine. Cool, but not too cold. You know what it puts me in the mood for (aside from a chilled glass of fine Portuguese white wine)? A nice, big, fat pay cut. That's what.
You see, it suddenly struck me that Visa (V) is a better company than Omega Healthcare Investors (OHI). Why I think this is entirely irrelevant. The point is, I am basically sitting here asking myself an uncomfortable question that I rarely ask but probably should. Why do I own four times more shares in OHI than I own in V? The honest answer is because OHI pays a massive dividend, and V does not, and because OHI is relatively cheap, whereas V is most certainly not. But are either of these actually good reasons to hold a merely good company in a tough industry marked by fierce competition, when I could be owning an almost magically excellent company in a thriving industry with high competitive barriers? I'm not sure I am going to like the answer to that question, but that's not going to stop me from asking anyway.
I've always insisted on owning only well-managed companies at the very best prices I can. And like a shark constantly and yet mindlessly moving to keep water flowing over his gills, I am continually seeking to boost my portfolio dividends. Why? Well, so I can reinvest whatever dividends I don't spend, obviously. Compounding is the only type of investment activity I believe actually works.
So you see, I'd easily classify myself as a value-oriented, dividend growth investor. But that said, I don't see how it makes sense for me to overweight my portfolio towards low PE ratio, high dividend stocks at the expense of stocks in companies like V that actually deserve the much higher multiples that they trade at. It's not like stock prices are invariably unrelated to value.
That is why I am scaling back my position in OHI and boosting my recently added positions in V, CSX Corp. (CSX) and Microsoft (MSFT). I've also decided to prune some shares of WP Carey (WPC) which now comprise a higher percentage of my portfolio than I wish. The proceeds from this I have pushed into more shares of Disney (DIS) and LVMH (OTCPK:LVMUY) since these are two fantastic businesses that just so happen to be trading at what I view as attractive prices.
It appears that I am breaking with DGI orthodoxy. I've swapped cheaper stock for companies that trade at higher multiples, and I will be receiving dramatically lower dividends in the immediate term. But even though I might look it, I am not actually crazy. The reason why I'm more than happy to receive lower dividends is because frankly, I believe that V, CSX, MSFT, DIS and LVMUY will reinvest their retained earnings at higher rates of return than I can reinvest their dividends. I just assume let them keep their extra earnings and invest that money for me rather than paying most out as dividends. I'm not the only factor in the compounding equation, so I'm not really breaking with my obsession with compounding earnings. What I'm doing is I'm delegating.
And yet, part of me is still worried that I will be shunned... even excommunicated from the DGI club. Maybe I will have to make a new club, with a new acronym. It'll be the quality growth investing (or QGI) club.
The new portfolio allocations are shown below. I have lowered my portfolio's composite EPS growth rate to 8.36%, and the dividend growth rate down to 10.47% since last February. But in my mind, DGI and QGI aren't actually dissimilar in the least. Most successful DGI investors would probably agree with me that there is more to dividend growth investing than simply maximizing portfolio cash flow. It's the quality of that cash flow that matters at least as much, which ultimately translates to just one thing: the quality of the products and services of the businesses that you own, and how effectively the business managers can reinvest earnings back into profitably growing the business.