Book Review: Beating the S&P with Dividends
9 June 2007Pros:
1. A good primer on dividends.
2. Identified characteristics of solid dividend paying stocks.
Cons:
1. No road map or system to choosing solid dividend paying stocks.
Rating: ** (2 out of 5)
In hopes of finding techniques to analyze dividend paying stocks, I picked up “Beating the S&P with Dividends” by Peter O’Shea and Jonathan Worrall. The subtitle of the book is “How to build a superior portfolio of dividend yielding stocks.” Perfect. That is exactly what I would like to do!
The book was basically split into 3 sections:
Facts about Dividends
The book starts with a primer on dividends. It discusses such topics as what a dividend is, why companies pay dividends, how dividends are taxed, and it looks back at how dividends have grown in the past during the different market cycles. This information is useful to an investor just starting out and will definitely get you excited about investing in dividend paying stocks.
Choosing the Right Dividend Paying Stocks
This is the section that I was most looking forward to: how to choose these winning dividend paying stocks. The book lists common characteristics of dividend achievers:
- Dividend companies are larger and more mature
- Dividend companies are past their growth phase
- Dividend companies have low levels of research and development expenditure
- Dividends require strong cash flow
- Dividends growth requires strong earnings growth
- Disciplined management is key
This was interesting. They claim that the dividend achievers are mature businesses that are past their growth phases (which means that they do not need to plow all their earnings back into the company) and thus have lower levels of research and development.
The strong cash flow and earnings growth definitely makes sense. I had incorporated these observations into my own analysis techniques already. You need cash to pay for dividends. And if you don’t grow your earnings, then your dividend payout ratio will have to increase if your dividend growth is greater than your earnings growth.
The book then discusses the useful yields and ratios when studying dividend achievers:
- Dividend yield
- Payout ratio
- Price-to-earnings ratio
- Return on equity
- Price-to-sales ratio
- Debt-to-equity ratio
This is the section that most disappointed me. I was hoping to be able to develop a stock screen from this section of the book. However, the book did not go into details. Although it explained what these ratios and yields were, it did not give a ‘game plan’ on using these numbers to find the winners.
The book discussed the Mergent dividend investing strategy which is based on two central criteria:
- Dividend consistency
- Consistent dividend increases
Basically, if a company has increased their dividends for 10 consecutive years, then the company is considered a dividend achiever.
Where to Buy Dividend Achievers
And lastly, the book discusses how to invest in dividend achievers. It discusses using different types of mutual funds, exchange traded funds, direct purchase plan, and direct reinvestment plans.
Conclusion:
I was personally disappointed with the book. I think the subtitle “How to Build a Superior Portfolio of Dividend Yielding Stocks” led me to believe that the book would offer a road map to finding these stocks. I think my inclination towards value investing leads me into wanting to place a value on a stock so that I know that I am buying it at a fair price. This book seems to imply that a dividend achiever is worth buying at the market price.
I will definitely be using the Mergent Dividend Achievers list as a filter for selecting stocks to analyze. But that is just a starting point for my analysis - not the end of it.
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