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Author: babyfrog Big red star, 1000 posts Old School Fool Home Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 8740  
Subject: Why this board? Date: 4/14/2004 12:05 PM
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Note: much of this post is adapted (or taken directly) from http://boards.fool.com/Message.asp?mid=18003620 . As the author of that post, I am giving myself permission to quote myself liberally.

I believe that dividends are the most important part of investing. The cash flow from dividends is a tangible reward and an often overlooked part of the "risk/reward" trade off. In addition, a dividend is about far more than the cash flow, itself. A share of stock represents a fractional ownership stake in a company. As owners, those "earnings" really belong to the shareholders. If management doesn't like that fact, then management can take a company private and do with it what it likes.

A dividend is the method by which owners' earnings are transferred from the company to the owners. Companies that pay and grow their dividends in proportion with their earnings better acknolwledge the fact that the CEO may run the company, but the CEO really does work on behalf of the shareholders.

It's hard to fake dividends. In order to pay out dividends, a company needs cash on hand and retained earnings. If a company constantly has to borrow money to pay its dividends, then that borrowing becomes evident pretty quickly, putting into question the company's accounting. Additionally, If a company claims extremely rapidly growing earnings, but doesn't adjust its dividends appropriately, that's a signal to investors that the earnings may not be as clean as they originally appear.

Dividends, if reinvested, compound quickly. A stock with a 2% dividend yield that grows its dividend by 8% a year (not difficult if the underlying company is growing Earnings per Share 8% a year) will provide around 10% compound annual 'income' growth rate to the shareholders who reinvest. In addition, if the company's yield is held constant, an increasing dividend helps promote an underlying capital gain, as well. In addition, on a large enough base, dividends can provide inflation-protected income.

Dividends are hedges against stock dilution. If a company has 1 billion shares and is paying a $0.10 per share dividend, then that company has to come up with $100,000,000 in cash. To maintain that dividend in the face of options grants or stock-funded purchases that increase the company's float to 2 billion shares, the company needs to come up with $200,000,000 . As such, it becomes a lot harder to dilute the value of the existing shareholders' shares with dividend paying stocks, because the dilution results in additional money the company has to pay out to maintain its dividends.

And of course, dividends are extremely strong signaling devices. Dividends are not guaranteed payments. As such, when times get tough or management is expecting things to go less well than they are publically claiming, they may feel pressure to reduce the dividend, maintain it as static even when they're publically forcasting earnings growth, or rise it less quickly than earnings are rising. Alternatively, if management does raise its dividends, in line with earnings growth estimates, then it is a very clear signal that the management really believes they can make those targets. That signal helps separate the truth from the accounting and helps provide a clearer picture of the overall health and strength of the underlying company.

Because of the value of dividends to ensuring decent corporate governance, companies that pay and grow their dividends often make worthwhile investments for reasons beyond just the current income from the dividends. The purpose of this board is to research, analyze, and discuss companies that fit into the dividend growth strategy.

Thanks for visiting, and I hope you stick around and participate in the discussion!

-Chuck
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Author: agg97 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4 of 8740
Subject: Re: Why this board? Date: 4/14/2004 12:27 PM
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I believe that dividends are the most important part of investing.

I agree that dividends are one of the most important, if not the most important keys of investing. This is one of my main arguments why a Roth is so much better than a TIRA, regardless of income tax rates during contributions vs. distributions. Inside a Roth, you get to keep all of the dividends rather than splitting them with the Uncle Sam later.

I have a feeling that many of the investors here invest substantially beyond IRA's and 401k's, so I'm preaching to the choir here.

-Agg97

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Author: dlbuffy Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6 of 8740
Subject: Re: Why this board? Date: 4/14/2004 12:57 PM
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Hey Chuck,
Adding this to my Favs to see where you go with this board. I use dividend stocks as ~80% of my ROTH (most of the time...)

Glad to hear you are starting this discussion, and I can provide a foil to your idea..."dividends are the most important part of investing."

Buffy (who agrees the are a big part, but the most important part is research...)

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Author: babyfrog Big red star, 1000 posts Old School Fool Home Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7 of 8740
Subject: Re: Why this board? Date: 4/14/2004 1:10 PM
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Hi, Agg97,

This is one of my main arguments why a Roth is so much better than a TIRA, regardless of income tax rates during contributions vs. distributions. Inside a Roth, you get to keep all of the dividends rather than splitting them with the Uncle Sam later.

I have a feeling that many of the investors here invest substantially beyond IRA's and 401k's, so I'm preaching to the choir here.


Welcome to the board, and feel free to share your thoughts. Don't worry about preaching to the choir! Sometimes, even the most dedicated investors need reassurance, and there will always be lurkers who can learn from your experience and knowledge.

-Chuck

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Author: babyfrog Big red star, 1000 posts Old School Fool Home Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8 of 8740
Subject: Re: Why this board? Date: 4/14/2004 1:14 PM
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Hi buffy,

Buffy (who agrees the are a big part, but the most important part is research...)

d'oh! of course! My bad. Thank you for pointing that out. What I didn't say, but should have, is that finding out a company's dividends and its dividend strategy and history are an important part of the research into whether or not a company is a decent candidate for investing. The resarch is, of course, key.

Thank you, my friend.

-Chuck

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Author: merrybird Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9 of 8740
Subject: Re: Why this board? Date: 4/14/2004 1:18 PM
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I love my Altria dividends!!!!!!!!!!!!!

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Author: TMFAdmiral Big gold star, 5000 posts Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10 of 8740
Subject: Re: Why this board? Date: 4/14/2004 1:37 PM
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Hi Chuck,

Congrats on your board and I absolutely agree with you - the untouchable core of my portfolio has dividend paying stocks as the base and I always Drip regardless of valuation.

I shall follow this board and post from time to time with one proviso - that you reciprocate and post your undervalued stock ideas (well some of them) over here at the Admiral's Quarters http://boards.fool.com/Messages.asp?mid=20634154

OK I'll post here anyway :-)

Best Regards
Philip

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Author: sunrayman Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11 of 8740
Subject: Re: Why this board? Date: 4/14/2004 1:46 PM
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Chuck,

I'll be swinging by periodically, this is now on my Favs.

sunray

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Author: wysockiman Big gold star, 5000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12 of 8740
Subject: Re: Why this board? Date: 4/14/2004 1:50 PM
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Chuck:

I took the liberty of posting your original post in this thread over at the MF Income Investor Picks discussion board. Just spreading the word, don't you know.

David

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Author: scottfm Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15 of 8740
Subject: Re: Why this board? Date: 4/14/2004 2:31 PM
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Hi Chuck,

Came over from the GE board. Great opening statement. Looking forward to this board's discussions.

- Scott, who owns the following dividend paying stocks:

GE, HD, PFE, MSFT, INTC (DELL is my lone holdout :-( )

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Author: wysockiman Big gold star, 5000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 16 of 8740
Subject: Re: Why this board? Date: 4/14/2004 2:40 PM
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Nice dividend stocks to ponder:

VIVO, PFE (if you can tolerate their prescription drug politics), TE (a utility turnaround situation), PEP (trouncing KO, don't you know, and just raised their dividend by over 40%), JNJ (consistent growth).

David (who owns them all)

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Author: dlbuffy Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28 of 8740
Subject: Re: Why this board? Date: 4/14/2004 4:21 PM
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Admiral!

Have you been demoted? Your feste has turned silver again? The little 'alt' code says winner but I think the reneged on your trophy.

Buffy (who wouldn't want to see the Admiral lose a medal...http://www.antiquemapsandprints.com/p-16022.jpg)

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Author: hondodog Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 31 of 8740
Subject: Re: Why this board? Date: 4/14/2004 4:35 PM
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babyfrog: dividends!
buffy: research!


(respectfully, i will disagree...research is important, but not all inclusive, dividends are important, but not the sum total)

(fanfare...pause...)
time x dividend x growth = "total return"!

change any part of the equation and you force more work on the other portions to pick up the slack....

(those readers of the FC board may wish to skip ahead, this is a repeat)
my dad's story:
in 1968 or thereabouts, he put $1000 into the local electric utility, Potomac Electric. in the mid 70's he but in another $2-3000...he is still holding this stock today (pepco holdings, POM).by most measures this is an indifferent, perhaps even mediocre stock. for the last 40 some years he has been reinvesting the dividends of this stock. He has over 3000 shares. each quarter he receives nearly $1000 in dividends, which he continues to reinvest.

just think what it would have been worth if he had invested in an even better stock over that time...(where Buffy's research will bear fruit)

i look for stocks that have a history of 10-15% growth of capital gains, of dividend, book value earnings and growing market share. i want stocks that will be here in 40 years. (i want it all).

i will recommend to those who have not yet discovered the concept of "total return" stocks to look at 2 sources:

"Mergent's Handbook of Dividend Achievers", (the old Moody's, new publisher) which is found in the research section of your local library, published yearly.

"The Dividend Rich Investor", by S&P

S&P book is a quick read, with variations of dividend investing...

Moodys (mergent's) is an annual list of the top 2-300 stocks ranked by order of total growth of capital and dividends, over a 10 year time frame. (stocks get dropped by reducing dividends, do not get picked up unless they have a history of 10 years of dividend growth).

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Author: brewer12345 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33 of 8740
Subject: Re: Why this board? Date: 4/14/2004 4:48 PM
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i want stocks that will be here in 40 years.

*************************

This aim perplexes me. There are so very few companies that are still around after 40 years, I just cannot imagine restricting my investment choices that much. After all, many companies get acquired, often at quite nice premiums. You might have to re-deploy some capital, but so what?

One of my dividend payors is PLMD, which only began paying out a year and change ago as they started to run out of hot growth investments for their retained earnings. It is a nice business with good growth, and in its short dividend history has already bumped the payout 20%. It is not too hard to see that their cash flow will only continue to grow by leaps and bounds over the next few years, with dividends presumably following. My best guess is that this company is bought out within 5 years (tops). Would you really drop something like this from consideration? Not me.

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Author: hondodog Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40 of 8740
Subject: Re: Why this board? Date: 4/14/2004 6:37 PM
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There are so very few companies that are still around after 40 years, I just cannot imagine restricting my investment choices that much. After all, many companies get acquired, often at quite nice premiums....Would you really drop something like this from consideration? Not me.

no, i would not automatically discard a high growth dividend payer just because of a short history...

however, i do want a good portion of my portfolio to be stable, long term buy and hold companies....at this time in my life my focus is on my career...i do not have the time or energy to constantly monitor the market, and constantly research new opportunities...and i have a personal life to maintain and enjoy.

i identify the growth and stability of a company, if it has a history of 40 years of dividend growth so much the better....time compounding is an easy way to achieve sucess in the market (the approximate compounded return on my father's rather mediocre stock POM over 40 years is 63% a year over initial investment, and he has done nothing but ignore it over that time....given the time i have to invest, research, and learn, long term total return growth seems a good place for "easy money" without the sweat, tears, and angst of daily gyrations of the market...this will give me "time" to overcome all my mistakes that i will be making on the short term selections. :)

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Author: hondodog Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 42 of 8740
Subject: Re: Why this board? Date: 4/14/2004 8:20 PM
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(the approximate compounded return on my father's rather mediocre stock POM over 40 years is 63% a year over initial investment

oops, i meant to type 53% a year...

still, the point is that compounding of growth over time will pay off...
POM had very little capital/earnings growth, but had steady, slow dividend growth, and is still a winner, because of 40 years....it beat inflation...

if you take a company like Sysco, which has averaged 15% growth of dividends, 15% growth of capital, and whose book value and sales growth have kept pace, you have a real shot at beating the market, over time. i have owned this for 3 years, with a 42% total return (i.e. 13% total return each year over my initial cash investment). not bad for a 1% yield.

i have high hopes for this stock in 20 years, given its market position and growth history.

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Author: GinnyW Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 48 of 8740
Subject: Re: Why this board? Date: 4/14/2004 9:41 PM
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My favorite dividend stocks are PNY, WTR ASO and CAG. I have drips and mine are all about dividend growth.
Glad to see this board here.
Ginny

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Author: babyfrog Big red star, 1000 posts Old School Fool Home Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 54 of 8740
Subject: Re: Why this board? Date: 4/14/2004 10:16 PM
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Hi, David,

I took the liberty of posting your original post in this thread over at the MF Income Investor Picks discussion board. Just spreading the word, don't you know.

Thanks! We can certainly use all the promotion we can get. And as I can tell from the link over on the right hand side... -------------->
...The Motley Fool Income Advisor has returned the favor.

Maybe we'll see some activity here from the esteemed author of that newsletter.

-Chuck

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Author: catscanner Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 60 of 8740
Subject: Re: Why this board? Date: 4/14/2004 11:20 PM
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i identify the growth and stability of a company, if it has a history of 40 years of dividend growth so much the better....time compounding is an easy way to achieve sucess in the market (the approximate compounded return on my father's rather mediocre stock POM over 40 years is 63% a year over initial investment, and he has done nothing but ignore it over that time....given the time i have to invest, research, and learn, long term total return growth seems a good place for "easy money" without the sweat, tears, and angst of daily gyrations of the market...this will give me "time" to overcome all my mistakes that i will be making on the short term selections. :)
-------------
I would recomend that you, and other dividend hounds, review the newly created board "The BMW Method". Here we are discussing the ability to purchase good, long term stocks at discounted prices, using the CAGR ranges for the stocks history to find them at the low point. Many are dividen paying stocks.

cat

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Author: desertdaveataol Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 108 of 8740
Subject: Re: Why this board? Date: 4/16/2004 12:37 AM
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Ginny, Why ASO and CAG?

I assume they are DRIPs too?

If so, any discounts on reinvested dividends like PNY and WTR?

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Author: GinnyW Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112 of 8740
Subject: Re: Why this board? Date: 4/16/2004 1:27 AM
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Dave,
ASO because it has increased its dividend for over 30 years. No, there is no discount. CAG because it has increased its dividend for over 20 years. The average dividend increase has been 11% for ASO and about 14% for CAG. I have them both as drips.
Ginny

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Author: DrBob2 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 118 of 8740
Subject: Re: Why this board? Date: 4/16/2004 8:10 AM
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(the approximate compounded return on my father's rather mediocre stock POM over 40 years is 63% a year over initial investment.
---
oops, i meant to type 53% a year...


Something must be wrong about that number. $1000 compounded at 53% for 40 years would be $24 Billion. Warren Buffet, move over. :-)


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Author: nmckay Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 128 of 8740
Subject: Re: Why this board? Date: 4/16/2004 6:09 PM
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I'm assuming he meant a 53% dividend on his original investment. Which is still amazing.

nmckay

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Author: hondodog Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 222 of 8740
Subject: Re: Why this board? Date: 4/20/2004 5:56 PM
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(the approximate compounded return on my father's rather mediocre stock POM over 40 years is 63% a year over initial investment.
---
oops, i meant to type 53% a year...

Something must be wrong about that number. $1000 compounded at 53% for 40 years would be $24 Billion. Warren Buffet, move over. :-)


I'm assuming he meant a 53% dividend on his original investment. Which is still amazing.

nmckay


ok, the dreaded secret is out....i am math challenged, i even flunked Calculus, twice! never had finance math, luckily for my career, i am very good at geometry and 3-dimensional visualization....however, as i have told my father, if i could add, i would be an engineer! :)

perhaps you can confirm my math:
approximate initial investment $3000, reinvested over 38 years (i don't know original number of shares).
current shares after dividend reinvestments, splits, etc, 3100 (approx)
current value, assumed on $20 market price x 3100=62,000.
62000(current value) divided by 3000(initial investment)=20.67
20.67 return divided by 38 years=0.54/year=54% return, no?

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Author: babyfrog Big red star, 1000 posts Old School Fool Home Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 227 of 8740
Subject: Re: Why this board? Date: 4/20/2004 8:56 PM
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Dana,

perhaps you can confirm my math:
approximate initial investment $3000, reinvested over 38 years (i don't know original number of shares).
current shares after dividend reinvestments, splits, etc, 3100 (approx)
current value, assumed on $20 market price x 3100=62,000.
62000(current value) divided by 3000(initial investment)=20.67
20.67 return divided by 38 years=0.54/year=54% return, no?


My math works it this way...

$3000 * ((1+X)^38) = $62000
(1+X)^38 = $62000/$3000
(1+X)^38 = 20.66667
1+X=20.66667^(1/38)
1+X=1.0829599
X=0.0829599
X=8.3%

By my math, it works out to an 8.3% compound annual return.

Hope this helps.
-Chuck

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Author: catscanner Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 228 of 8740
Subject: Re: Why this board? Date: 4/20/2004 8:56 PM
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I come up with 8.3% for a compound annual growth rate.

Assumptions:
1. Start with $3000
2. hold it for 38 years.
3. Current value is $62000

I used the following web site for this: http://www.csgnetwork.com/cagrcalc.html

cat

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Author: hondodog Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 236 of 8740
Subject: Re: Why this board? Date: 4/21/2004 2:39 PM
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cat:
a chart! what will they think of next? :)

(thanks for the link, i have bookmarked this for future use)

hondodog

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Author: hondodog Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 237 of 8740
Subject: Re: Why this board? Date: 4/21/2004 3:11 PM
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chuck:
thanks for the math check....
$3000 * ((1+X)^38) = $62000
(1+X)^38 = $62000/$3000
(1+X)^38 = 20.66667
1+X=20.66667^(1/38)
1+X=1.0829599
X=0.0829599
X=8.3%

By my math, it works out to an 8.3% compound annual return.


to tie this back to the main point....my father invested $3000 over 38 years ago, and did nothing but reinvest the dividends. His compound annual return was a mere 8.3% :) and this mediocre stock is paying him almost $4000 a year in dividends!

this really illustrates the power of time and money IMHO. i look for higher total growth of dividends and earnings in the stocks i wish to hold over time, but even this boring utility stock did well for my dad over the years.

it gives me confidence that i as a small investor can put some of my money in stocks that have a history of growing dividends, (and a growing company) and have a real shot of beating inflation, with a nestegg for my old age.

with all of the shrink stocks i have seen over the last 3 years, i think stable, dividend payers that offer growth and stability have a real place in a portfolio.

in mine, i am allocating 60% target, split among reits and common equities from a mix of small medium and large cap stocks. the remaining 40% is being split between growth stocks bought on value (20%), and shorter term "contrarian opportunities" as they manifest themselves



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Author: catscanner Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 238 of 8740
Subject: Re: Why this board? Date: 4/21/2004 9:59 PM
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to tie this back to the main point....my father invested $3000 over 38 years ago, and did nothing but reinvest the dividends. His compound annual return was a mere 8.3% :) and this mediocre stock is paying him almost $4000 a year in dividends!
---------------------
Just for the sake of discussion, and NOT to place any undo criticism upon your father's decisions ('cuz it was a good decision), but, we do need to put some other information out.

38 years ago was, hum, 1966.

New Mustang cost what $2500? A new house, $25k? Annual income, $12-$15K?

This information may help us determine how savy he was. If he spent the equivalent of 3 or 4 months salary to invest in this one stock, taht would e the equivalent of me investing $15-$20k in one stock. That's alot of money, especially in one stock.

Now, you're getting $4k a year in dividends. @ $330 a month. That's real nice income, even with a 15% tax (net @ $280 a month).

The question tho' is, should one invest such a large amount in one stock, on the chance that in 38 years you will be getting such a small amount of income? If you were able to invest in say a group of stocks, getting 10% on average, compounded, that $3000 would then be worth over $97k.

Anyway, not to fan any flame wars, but I think that the entire picture s/b looked at.

cat

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Author: hondodog Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 244 of 8740
Subject: Re: Why this board? Date: 4/22/2004 6:00 PM
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The question tho' is, should one invest such a large amount in one stock, on the chance that in 38 years you will be getting such a small amount of income? If you were able to invest in say a group of stocks, getting 10% on average, compounded, that $3000 would then be worth over $97k.

you are absolutely right. this was one stock among a portfolio of 8-10 stocks he has held over the last few decades.(also, the only one i am privy to info on, simply because he likes to tell the story). it was IMHO worthy of illustration, simply because it was not a 'great' stock, but, illustrates the compounding nature of time and dividends, it grew into a 20 bagger (20.65 total growth of dividends and capital).

i whole heartedly agree that a higher growth selection would be a superior choice, and that better diversity would spread the risk, without reducing the return potential too much.

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Author: BruceCM Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 567 of 8740
Subject: Re: Why this board? Date: 6/22/2004 12:47 PM
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Chuck
Per my TI BAII Plus Financial Calculator, 8.3% is the compound rate of $3,000 invested 38 years ago with a present value of $62,000...but if I understand Hondodog correctly, that's not what's going on here. Quarterly dividend payments, immediately invested, create an ordinary annuity with an uneven cash-flow stream. Accurately calculating the annual compount return (or the IRR) is possible but would be EXTREMELY time consuming, as each dividend amount would have to be entered into the SS (or financial calculator), one at a time...that's 154 entrys. And even if the annual dividend rate remained constant (which it didn't, as it likely grew over time), the dividend would grow as the investment base would grow with each DRIP. Whew!!

I don't have time to set up this kind of SS to calculate IRR...but the above calculated 8.3% would certainly decline. This is a wag, but I'd say down to the 5-6% range...which is not that out-of-line for a utility.

BruceCM

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Author: BruceCM Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 568 of 8740
Subject: Re: Why this board? Date: 6/22/2004 1:26 PM
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Chuck
To your original post...

As a pure income investor (part of my portfolio is also Total Return), dividends are everything. I live on them! They are as important to my wife and I as a paycheck was when I was working! In fact, I'd go so far as to say that in the non-human world, they are THE most important part of our retirement life. Thus, I spend most of my investment analysis time focusing on a company's ability to sustain and grow its dividend.

Now, having said that, let me offer a couple of points to your excellent discussion on corporate dividends.

<It's hard to fake dividends. In order to pay out dividends, a company needs cash on hand and retained earnings. If a company constantly has to borrow money to pay its dividends, then that borrowing becomes evident pretty quickly, putting into question the company's accounting.>

In analyzing a company's ability to sustain its dividend, one must look closely at where the dividend is coming from. Most of the time it comes from, as you point out, retained after-tax earnings. Great! But if the earnings aren't there, one has to go to the next step in this analysis...what are the non-cash expenses (depreciation and amortization) and add them back. If the dividend does not exceed this, then the ROC is what I call "Good ROC" (REITs routinely do this). But if the dividend still exceed this, things may not be so good and we may be getting into "Bad ROC" (I'm ignoring net capital gains, as this is unusual in all corporations except REITs)

Now, this "Bad ROC" distribution doesn't come from borrowings....it'll come from either cash reserves or liquidated assets. In either case, you would be having company assets returned to you. This, to me, is tantamount to lying. Yes, there are other non-operational expenses, such as capital expendatures and so called 'One-time' charges. But if management's operational cash flow is so poor that they cannot make dividend payments with at least "Good ROC", then why are they spending money on non-operations? Under these circumstances, unless management addresses this condition in a news release or their annual statements, it is probably a company I don't want to be invested in, as the risk of a forthcoming dividend cut is high.

BruceCM

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Author: freethinkerkeywe Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1667 of 8740
Subject: Re: Why this board? Date: 5/3/2005 9:24 AM
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Chuck, great post for being just the second post on this board. I just recommended this (rec:31) and I hope other new readers will read this reply and link to your post which makes a whole lotta sense.

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Author: freethinkerkeywe Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1668 of 8740
Subject: Re: Why this board? Date: 5/3/2005 9:28 AM
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Let's say you make a maximum investment into your Roth IRA for each year . . .and all of the stocks you buy are dividend payers.

When the dividends are paid . . . how can you reinvest them if you have already deposited the maximum amount into your Roth IRA at the beginning of each year?



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Author: Matt1344 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1673 of 8740
Subject: Re: Why this board? Date: 5/3/2005 11:41 AM
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"When the dividends are paid . . . how can you reinvest them if you have already deposited the maximum amount into your Roth IRA at the beginning of each year?"

Hi freethinkerkeywe,

The dividends don't come out of the IRA, they're part of the growth that can take place in the IRA. Just like selling a stock for a profit, the proceeds stay in the IRA and neither are part of new money deposited by you.

If you were to take the dividends out of the IRA to invest somewhere else then that would be a distribution... another subject...

Regards, Ken

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