Just wanted to chime in and say thanks for the healthy debate. I don’t have much to add except that I am an indexer (in our RRSPs) but hope to delve into dividend stocks once my husband’s RRSP is maxed out (we have lots of catching up to do!)

And btw, you can add one more to the nerd readers…engineer here as well.

BTW, the entire second comment is by SteadyHand’s Tom Bradley. The comment doesn’t imply that dividend investing doesn’t work. It simply says that if you start dividend investing today, it may under perform in the future because it has been very successful in the recent past.

CC, you said:
“Okay, you picked JDS, realized it was a mistake and then picked value stocks. So, what will you do when the performance of value investing stinks? If you answer, I’ll stick to the strategy because I know it works, congratulations! You’ll likely have good performance as an investor. However, for most people, I know the answer: they’ll look for a new strategy!”

The same could be true for people holding ETF’s or index mutual funds. If the markets tank, most people will panic and sell their holdings in an attempt to salvage some of their money, and start looking for a new strategy.

Whether you follow a dividend strategy, value investing strategy, or ETF strategy the key is to have the patience and discipline to stick to a strategy.

CC, you said:
“Certainly this strategy has been successful so far this decade, but it truly has changed from being an investment strategy to conventional wisdom. That tends to take away the appeal and significantly reduce the opportunity for above-average returns.”

If you read:
- The Dividend Connection, Geraldine Weiss, or
- The Dividend Investor, Harvey Knowles, or
- checkout http://www.dividendgrowth.ca

you will see that the dividend strategy has worked for more than 75 years (that’s as far back as the records go). Tom Connolly (from http://www.dividendgrowth.ca) has been doing this for more than 26 yrs and you can see his results. Geraldine Weiss has been writting about this stuff for more than 40 years (www.iqtrends.com). The dividend strategy has worked for more than just a decade.

Going back further Benjamin Graham first wrote about value investing in 1934. I follow a value investing approach with a focus on dividend paying stocks.

As far as everyone jumping on the value-investing dividend-investing bandwagon, Warren Buffett had this to say about it in a speech he gave at the Columbia Business School on May 17, 1984:

“I can only tell you that the secret has been out for 50 years, ever since Ben Graham and Dave Dodd wrote Security Analysis, yet I have seen no trend toward value investing in the 35 years I’ve practiced it. There seems to be some perverse human characteristic that likes to make easy things difficult. The academic world, if anything, has actually backed away from the teaching of value investing over the last 30 years. It’s likely to continue that way. Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham & Dodd will continue to prosper.”

Let’s take RY as an example: in five years between 2002 and 2007, dividends have gone up from $0.19 to $0.46 or at a rate of almost 20% annually. The same stock increased dividends from $0.0625 to $0.085 between 1982 and 1996, or a 15-year stretch in which dividends increased or an annualized 2%. Inflation averaged 2.3% in the first period and 3.5% in the second. In other words, dividends from this common stock did not even keep pace with inflation in one time period.

A couple of things can happen to dividend-growth investing: (1) dividends may not grow that much in real terms for a significant stretch of time (2) investors realize that markets under priced dividend-growth in the past, so they start bidding up the price such that the advantage disappears (remember that these days the fundamental indexing folks are also chasing dividends).

CC: You say “I’ll admit that dividend investing is a decent strategy that has worked very well in the recent past. I am not convinced that it will continue to do so always (In fact, I am convinced that there will be long stretches where it won’t work and shake out the “recent converts”. That’s the only way it will continue to work in the future).”

I’m honestly interested (not trying to debate you, I want to learn) in what possibility can you imagine that dividend investing won’t work? Is it just that it gets so popular that dividend prices are pushed up and the yields are pitiful, or do you imagine that established companies that have long histories of dividend payments are going to stop paying or lowering dividends? Or something else entirely? Was there a time in the not-so-recent past where dividend investing didn’t work? What was the environment that lead to that?

I agree with the value of index investing (real estate, index investing and blue-chip dividends are the three avenues I’m currently pursuing for acquiring wealth) but dividends seem to outperform index investing right now.

Okay, you picked JDS, realized it was a mistake and then picked value stocks. So, what will you do when the performance of value investing stinks? If you answer, I’ll stick to the strategy because I know it works, congratulations! You’ll likely have good performance as an investor. However, for most people, I know the answer: they’ll look for a new strategy!

I don’t understand your comment about passive investors losing 50%. Of course, investors will hold investments they wish they’d never heard of. At times, some holdings will perform well and some will truly suck. Other times, the roles will be reversed. Its even more so for stock investors.

I too lost money in JDS when I first ventured into stock picking, but JDS was neither under-valued nor paying dividends. Imagine in your everday life you quit at the first sign of hardship, then you’ll never accomplish anything. No one is a natural-born guru. You’re supposed to fail at first. You learn from your mistakes, and then you stop buying concept stocks like JDS and Nortel.

Dividend investing is a conventional wisdom? I doubt it. The market is stuck in a perpetual PMS. It is too emotional to follow the decipline of dividend and value investing. On the contrary, passive investing IS a conventional wisdom. As ETFs and closet index funds become more pervasive, the market exibits more herd mentalities making passive investing riskier than ever before. It wasn’t too long ago when passive investors lost 50% in the TSX and S&P500, and over 80% in NASDAQ.