long hiatus

life goes on.
retirement investment goes on.
the market goes up and down, thankfully more up than down since my last post several months ago. However, the big July 2011 swoon had to be absorbed, and the updraft didn't really occur until first quarter 2012. What saved me from the panic of watching prices drop was dividends. They keep rolling in. Companies with good business models keep making money. Those with friendly shareholder policies keep paying dividends. That cushions the down-drafts. My only real investment errors has been to buy ideas that I like, like geothermal, or solar stocks, when I don't understand the underlying market forces that drive their values up and down. I have learned this the hard way more than once. I have to excercise more discipline in segregating my interests from my investing strategy.

I was seriously pre-occupied with stabilizing a real-estate investment debacle over the last several months. It cost me lots of sleep and a large cash investment to turn what was intended to be a short term investment into a long term hold, but fortunately that is now past and I can stop shoveling money down a high-interest debt hole. That was another life lesson in clearly understanding the risks of an investment before entering into it.

I have been able to ride the downs and ups of the market without a personal panic attack. That's a sign of maturing stature in managing my assets. As noted above, the dividend growth strategy has been a big factor in allowing me some comfort, even some sense of opportunity, when the market drops. I need to be more selective about when and where I deploy new cash, as last time around I invested a bunch just BEFORE a market decline rather than just after, inadvertently violating the buy-low rule.

I have also experienced another heady updraft in the last few months. Paradoxically, the updraft makes those dividend growth companies more expensive and purchasing more dividends becomes more pricey. Most people are happy when their stock prices go up. Dividend growth investors like bargains, so there's a conflict. I've been dealing with this dilemma and reading the thoughts of others, and my strategy is slowly taking form. There's a way to "juice" the dividend on stocks that have risen to "overvalued" It's called the covered-call option. You have to be willing to have the stock called away, but if you're happy with the combination of the gain that you lock in, as well as the call premium, you have a nice short-term dividend enhancement strategy, particularly if you're prudent with selling calls that are not too close to current stock price. The call premium generates cash, so there are still brokerage fees to consider when you deploy that cash, but as long as your gain is greater than the cost of getting in and out of a position, you can accrue a net benefit of the strategy in most cases. When that stock DOES get called away, you have to remember that it happened because the stock rose in price, and you got both capital gains AND an option premium. You can't cry over the excess gain that you might have missed.


Another way to manage the conflict between wanting income in your portfolio and the need to purchase stocks at inflated values in an up-market is to use your cash to sell a cash-covered put on the stock you'd like to have more of. If the price drops, you'll pick up those shares at the lower price, with the added value of the call premium in your cash balance. If the price drops well below your put position, you may have purchased and the put premium doesn't make up the difference, so you have purchased into a declining position. So what?...had you purchased the stock outright, you'd be down even further. If you want to hold that position anyway, you'll tolerate some volatility. AND, you're purchasing that stock at least partly for it's dividend generating capacity right? If it's a company that meets the dividend growth criteria, it's a company that steadily grows dividends, has steadily increasing earnings, and in the long run the stock price will follow earnings and dividends. In the long run you don't lose, so the options strategy simply helps you into the shares at a discount to the price where you deploy your cash. If you prefer, you can simply watch the ticker and set your entry point for the stock, but your cash will be idle and you have to be comfortable with limit orders that stay open indefinitely.

One of the values of a disciplined stock picking strategy is that you get to know the history of a given company and it's stock over time. If you have a working knowledge of it's business, it's earnings history, it's dividend payment history and the projections for growth, then you have a reasonable sense of what will happen with stock price and dividends going forward. This allows you to deploy the covered-call strategy (no cash balance required) when the stock has risen beyond what is supported by earnings in the short term (overvalued), and deploy the cash-covered put strategy when you have new money to invest and your stock is in a "range bound" condition where prices vascillate up and down. If you have cash and the price has already tanked, you may as well buy if you really want to grow a company's position.

It occurs to me that the sophisticated dividend growth investor will study a company very carefully, as a hunter studies the prey and the terrain, decide when and where to deploy cash to capture shares, and continually work to drive the average purchase price as low as reasonably possible, while building the position to drive that stream of dividends.
I haven't reached that level of sophistication. I'm still scanning for new, better dividend opportunities, but I find that I have to look harder, and more carefully, in places I'm less comfortable dwelling, as my portfolio grows. It makes sense to begin paying more attention to the companies I own and developing more sophisticated strategies to grow the positions. After all, sometimes things occur in those companies that lead to investment losses. If I'm not paying close attention, all my efforts could be lost due to a missed trend that leads to a shrinking position. That has happened to me already on more than one occasion.

In short;
I'm learning to look at valuation before I make a purchase.
I'm learning to look at earnings history, dividend history and payout ratio as a means to decide on the merits of an investment
I'm learning to consider when and how to add to a position, either by DRIP or by new purchases
I'm learning how to deploy cash in ways other than simply buying when cash is in the account.

so, I am learning...by and large, I'm also accumulating some modest assets, with some mistakes along the way.

sounds like how life often goes...