Investing in Dividend-Paying Stocks

​​TOM'S STORY (Stock Market Investing Case Study 3 of 8)

​Tom has been investing in the stock market for quite some time.  It is in year 2000 that he decided to manage his account himself after noticing that each buy and sell transaction made by his broker cost him $100.  Prior to that, he managed his own graphic design firm for about 20 years. He became very motivated to grow his portfolio as a way to generate income since his largest consulting contract had been terminated as a result of his client’s change in business focus, and so his services were no longer needed.

And also, he was inspired by a former client who took his company public – Tom saw how the price of a stock can climb. He remembers the owner believed very much in “baby steps”.

​Tom learned by reading a lot, and correcting his mistakes along the way.

For example, some of his mistakes were buying a stock because its ticker symbol was meaningful to him in some way (i.e. his son’s initials), or buying a car manufacturer because he is a fan. Now, he makes his buy decisions based on his analysis of the strength of a company.  He does take leads from analysts (for example, he enjoys the Business News Network) but he always does his own research and he makes his own decisions.
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His biggest challenge is the interpretation of the financial statements, though he found a solution that works for him.

Instead of overwhelming himself with all the details, he examines current year results in relation to previous years. He also looks for consistency in dividend payments, although he doesn’t necessarily eliminate a stock if the dividend was reduced. Depending on the reasons for the reduction, he believes it can be a sign of due diligence.  He learned that if the strength of a company doesn’t seem obvious early on then it doesn’t help to focus more time trying to make it so. He learned that it is a waste of time and energy trying to find something that isn’t there.

There were portfolio losses... big ones

For example, he lost 50K on GM. He learned to pause and laugh. He jokes with his buddies, he stays away from negative people and he doesn’t pay attention to bloggers and news that are all doom and gloom. He asks himself, if he sells everything because of an impending crash that nobody is exactly sure when will happen, then what? Guaranteed investments certificates (GICs) aren’t his thing. He knows stock market crashes have happened in the past and they recover.

Tom is very much inspired by a Warren Buffett quote which acts as a guiding principle for him:
 
       "… be fearful when others are greedy and greedy only when others are fearful."
               —Warren Buffett, Letter to shareholders, 2004.
 

His strategy in recent years is to focus on strong companies that pay a consistent dividend.

He keeps his portfolio to about 15 positions which he finds is a good number since he likes to keep an eye on them on a daily basis, 2/3 as a stable core, the other 1/3 are companies that he rebalances from time to time.

Tom doesn’t have a set method or rules, but he does watch and evaluate his account every day, especially during the first hour of the market which he noticed is usually the most active period of the day. If the price drops on one of his core holdings, he buys additional shares and sells them for a profit in the short term.  He likes the fact that he is making investments in quality companies and getting paid what he sees as “guaranteed income” (i.e. the dividend) and that the return is better than GICs. Since he started managing his account himself, his portfolio increased an average of 20% per year, excluding new deposits and adjusted for withdrawals.

Tom’s key piece of advice is to learn from your mistakes and do your homework.

He believes he is successful with his investing because he is good at learning from his mistakes, he doesn’t repeat them, he thoroughly checks out a company and he has a healthy paranoia.

He doesn't buy a stock unless he is convinced (by his own research) that it is a good buy

That's because he knows from his experience that fluctuations are part of the deal (his account can be up 10K one day and down 10K the very next day). For that reason, he needs to feel confident about the stocks he buys to weather market fluctuations.

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Case study based on March 25, 2015 interview conducted by Y. Gagnon
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