In general, long-term dividend investors and gardeners seem to have a lot in common.
I spend a significant amount of time each year tending my fruit trees. My plum and cherry trees started producing in late spring. Then come the blueberries and raspberries, and by early fall the apples, pears, grapes, and nectarines will be ready to pick. My Midwest farming community upbringing probably sparked my fascination and appreciation of watching things grow, but my guess is that there are certain personality types drawn to that process from all walks of life.
Like gardeners, dividend investors need to find fertile land that can hopefully produce a bountiful crop. Attempting to grow a peach tree in the middle of a rock quarry likely won’t work, but finding a sunny meadow with plenty of access to sun and water probably would. Likewise, history has shown that most companies that have had the ability to grow their dividends annually for the last several decades typically come from non-cyclical sectors like consumer staples and health care. Whereas, more cyclical sectors like information technology have a harder time producing consistent dividend growth due to the competitive and ever-changing nature of their business.
After picking the proper spot and tilling the fertile land, gardeners must select high quality seeds. To give their dividend portfolio the best chance to grow, investors should try to think long term and select individual stocks that are not of the “flavor of the day” variety, but instead, tilt toward proven business success through multiple economic rough patches over the previous decades. In other words, gardeners want Grade A blueberries, while dividend investors want Grade A blue chips.
After planting high quality seeds, now comes the hard part: patiently awaiting growth. Patience is an essential trait and not one that enough investors tend to possess. While some traders think six months is a long-term investment, Warren Buffett once said: “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.” While a 10-year holding period may not be right for every individual, it does help put you into a proper mindset that you’re buying a minority stake in an actual operating business that “opens its doors” every morning whether stock market sentiment is bullish or bearish. If you’ve selected a successful business, it typically means it earns more money than it spends. This is a welcomed feature because profits are the direct source of dividend payments.
Once the investment has started to show signs of growth, maintenance is essential. For many investors who view their stock as the “tree” and the stock’s dividends as its “fruit,” it doesn’t make sense to cut down the tree to access the fruit if they plan to continue enjoying that fruit in future years. Likewise, most long-term investors aren’t looking for excuses to sell their stock, because if they do, they won’t be able to enjoy the possible dividend growth that the stock could continue to provide in future years.
But that doesn’t mean you turn a blind eye to your investment and simply hope for the best. Any good gardener will tell you that clearing out the dead wood is critical for future growth. If an investment is not living up to your expectations and you find that the original prospect of dividend growth has turned into a reality of dividend reduction, then that investment may not be fulfilling its purpose and may need to be “pruned” out of your portfolio.
Payment of stock dividends is not guaranteed and dividends may be discontinued. The underlying common stock is subject to market and business risks including insolvency.
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