"My portfolios have their share of high-yield-slow-growth companies.
If you look at your portfolio from the income end of the lens, what can you do to improve your cash flow? (I don’t mean the average cashflow of the companies you own. I mean the cash flow of your investing business.) Answer: Buy shares in a company whose current yield is higher than your portfolio’s overall yield.
Example: I recently got fed up with Boeing. So I sold it right out of my portfolio. With the money I received, I bought shares in MMM (3.3% yield) and ENB (5.7%). Both yield more than BA. And with BA’s recent dividend freeze, one can say they are both faster growers too, even if that’s only temporary. Bottom line: My portfolio’s annual income went up a couple hundred bucks a year.
I’ believe that there are many dimensions along which you can diversify besides the traditional sectors and industries. Two of those dimensions are yield and DGR. Mix 'em up. So a well-rounded portfolio has some low-yield-fast-growth stocks, some mid-yield-mid-growth, and some high-yield-slow-growth. I think the individual investing business is sounder with a variety of income streams.
And if you’re accumulating, you’re reinvesting the dividends. The larger dividends drive faster growth in the income stream than the DGRs of the individual stocks. It’s the difference between investOR returns and investMENT returns. Your investment business counts investOR returns.
Dave"
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""“The larger dividends drive faster growth in the income stream than the DGRs of the individual stocks.” What’s this mean?"<<
It’s the math of things based on reinvesting the dividends.
Say a stock yields 4% and has dividend growth of “only” 5% per year.
The investment’s DGR is 5%.
But if you reinvest the dividends, in Year 1 you get that 5% + 4% more, because you reinvest 4% of the original amount you spent, and that purchases 4% more shares. If you originally bought 100 shares, after Year 1 you own 104 shares.
So your investor DGR (i.e., the growth in dividend money that lands in your portfolio) is 9% in Year 1.
I left out timing issues and price changes to illustrate the point. Real numbers will vary based on price changes and the like. But the basic math is real. You can create a simple table of Year 1 - 10 results to get a look at it. Commonly to do that, assume the price changes at the same rate as the dividends (i.e., 5% per year). That will make it a little more realistic, although of course no one can predict the future, so price changes and dividend increases are speculative.
The best way to see this in action is in a real portfolio. In my public Dividend Growth Portfolio, my dividend income in 2019 will be up 11% over 2018. Only 4 out of 26 stocks had DGRs that high. The “overage” came from the shares purchased with reinvested dividends, plus a couple of stock swaps like the Boeing swap that I described earlier.
Dave"