Dividend Investing

I have a couple different portfolios. With my older one, I mostly use dividend investing. It’s a portfolio for the long-term. My newer one is for Magic Formula investing. We're using it for money we want to use in about 4 years. Since most people already know about the Magic Formula, I figured I'd write about dividend investing this time.

I got the dividend investing idea from Motley Fool. Originally from the "Dogs of the Dow" plan back around 2000. “Dogs of the Dow” is simple. Pick the 5 stocks from the Dow with the highest dividend yield and re-adjust once a year. It worked well in the late 90s. It’s had some rougher years lately.

However, I never really did the "Dogs of the Dow" once I discovered that there were companies out there who paid 12% dividends. I actually just started randomly investing in very high dividend stocks with minimal screening. Some examples were AHR, CARS (gone now), KMP, and HT.

That actually worked out fairly well for me at first. But I eventually realized that those are some pretty darn volatile stocks. Mostly REITs and Energy stocks. So I figured it was time to diversify. I started out by adding more large cap stocks. I actually picked several of the Dogs of the Dow. I added in MO, CAT, GE, C, and a few others. At this point, my goal was to get the portfolio to have a total dividend yield of 7% or higher. Ideally, the stocks would also grow some and I could get return about 15% per year.

The 7% has been pretty tough, especially lately. REITs have been hit pretty hard so the portfolio has had a dividend yield closer to 5%. However, until this year, the growth has been pretty steady so over the last 5-ish years, I've averaged about 12% return per year.

My latest dividend investing tactic was to take the good dividend stocks and screen for value and quality. I'm not a huge stats geek, so I just concentrated on 2 numbers, P/E, and PEG. Then to balance it out I used Morningstar to devise a quality score. If a stock had a Morningstar rating of A,A,A, I'd give it a 3. A,D,D would be a 1. D,D,D would be a 0. Then I could give that score some weighting and use it in a formula. My basic screening formula was something like (40-P/E) + (10-PEG) + (MS rating) + (Div*10) or something like that so I could rank stocks.That’s about it.

Lately, of course, my new money has been going into “Magic Formula” stocks. However, several of these have high dividends as well (CHKE, FDG, PCU). Some of those, I've also purchased in my dividend portfolio. Basically, these are the best of both worlds. Good enough for “Magic Formula” and good enough for Dividend investing. Those are definitely my favorites. If I could find enough, I’d only buy this kind of stock.

Here's some lists.

Favorite long-term dividend stocks: AHR, HT, MMP, O, NRGY

Favorite Magic Formula AND Dividend stocks: PCU, FDG, CHKE, GNI, PBT

Dividend stocks that flopped: IMH, NEW, RAS (however, RAS only flopped after making me over 100% in dividends).