If you’ve followed my journey you’ll notice that I’ve always been a big fan of dividend investing for the long term. Although I’ve consistently invested in dividend stocks there have been a few minor changes in my strategy over the past couple years.
One of the biggest mistakes dividend investors do is to focus solely on yield, and I am no different. When I first started investing I focused mainly on yield and tended to favour stocks that had sizeable payouts. The problem with this strategy is obvious – without the earnings to back up the yield, the dividends tend to be unsustainable.
I learnt this the hard way and have dealt with a few dividend cuts over the past couple years.
The dividend cuts taught me to focus more on earrings and cash flow than simply chasing stocks with the highest yield, and my strategy has changed to focus on dividends that are sustainable. The focus on sustainable dividends generally means lower yield but I’m ok with this given a long term horizon, because I think these stocks will do well in the long run.
Long Term Focus
When I first started investing I was somewhat obsessed with short term results – I had google alerts set up for a number of companies and would buy/sell based on what the market was thinking at the time. Whether it was quarterly or annual earnings reports that made the stock price go up or down, it was bait of a roller coaster trying to follow several companies at once and buy when I thought they were low.
Since then my strategy has changed to focus on the long term, and be less focused on short term earnings reports. I’ll be honest – there are a few stocks I own that I don’t even follow. Why? Because I know that whether their current earnings are good or bad I still won’t sell, and if the stock price goes down I may buy more.
Less is More
When I first started out investing I actively tried to ‘time’ the market. I would buy and sell based on short term market indicators and while I wouldn’t call it day trading, I would definitely call it momentum trading. I hoped to make profits for the short term and my plan was to eventually build on the profits to invest in dividend stocks.
That experiment failed (somewhat) miserably as I quickly discovered that no one can accurately and consistently predict market timing. I learnt that time in the market is more important than timing the market – which meant being in it for the long term meant buying, holding and doing not much else.
Lately my investment strategy has been somewhat boring – buy and hold. And reinvest all dividends. Nothing else. No selling, no trying to call the ‘peak’ of the market. This strategy is much more straight forward and takes all the guessing out of it. Rather than trying to predict short term highs and lows I just avoid selling regardless of what the market does. If it goes up I hold and if it goes down I consider buying more. I figure this strategy works because with a time frame of 20+ years I don’t need cash right now, I need equities that will earn me dividends. I used to trade 10-15 times per month, and now I trade (buy) about once per month.
Conclusion – my investment strategy will continue to evolve but will likely stick to the following principles – investing for the long term, reinvesting all dividends and trading as little as possible.
What’s your long term investment strategy?