The rule is not about mathematical precision as much as its about orienting your frame of reference for investment selection and ongoing portfolio management - what am i looking for with this investment? What does "good enough" look like?
Its not the only metric, and probably not even the most important one, but its handy test that you can run every year to do a checkup based on your goals. Having hurdle rates for each company sets the expectations on what you're looking for for each kind of company. Is it a lower yielding but higher growing company or a high yield, steady as she goes? The Snowball Portfolio has both kinds. Here is the current check up for how many companies have cleared the 5+5 hurdle for 2013.
The other piece of the analysis is identifying those companies not clearing the bar. When will we see a meaningful dividend increase from Intel, Kraft, People's United, and Douglas Dynamics? Its not something to panic about in any of these cases, in my view, but its good to be aware. So from an ongoing monitoring standpoint the simple 5+5 Rule helps you focus on companies and could signal places where they might stall out.
Its just one way to combine data points, but its a tool I have found it useful both on the selection part f the process as well as on the ongoing monitoring and management part of the process.
Agree with the 5+5 guideline for the reasons you stated.
ReplyDeleteI'd also add that, assuming long-term returns roughly equal dividend yield + dividend growth (+/- PE), the market doesn't frequently give away 10% combinations as that's approximately the geometric avg. return in the U.S. market from 1928-2012 (Source: http://pages.stern.nyu.edu/~adamodar/).
As such, if you can consistently find firms with 10%+ combinations, you'll do all right for yourself in the long-term. Not easy, of course, and since the market doesn't like giving away such opportunities it's worth approaching any idea that you think can produce well over 10% with skepticism. (i.e. ask yourself what's you might be missing here). Safety first! :)
Best,
Todd
"it's worth approaching any idea that you think can produce well over 10% with skepticism. (i.e. ask yourself what's you might be missing here). Safety first! "
ReplyDeleteCould not agree more Todd
You have not answered the question "Why?" Why do you want to do this?
ReplyDeleteAs I understand it this equation helps an investor generate a total return of 10% on their investment over a reasonable period of time. If a stock paying four percent dividend increases their dividend by 10% a year, it's less than a decade before each dollar you invest returns you ten cents on every dollar -- every year. Yes?
-Adrian
@Adrian - good point. its an attempt to strike the balance between current income and future growth,
ReplyDeleteIts not and exact science, I have seen the Dividend Champion list which uses the "Chowder Rule" which is a 6+6 rule. But yes, trying to get your head around something that can approach a double digit yield on cost, is a good thing from a long term investor standpoint.
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ReplyDelete