I’ve admitted it in the past; I’m not the typical dividend investor. I started investing by trading, buying & selling every two weeks while most dividend investors usually buy and hold completing the sale transaction after several years holding their shares. In my opinion, the dividend investor is the upgraded version of the buy & hold investors. More often than not, the buy & hold and dividend investor is the same guy. I strongly believe in dividend investing, that is why 100% of my portfolio is composed of dividend paying stocks. I even wrote two books and created a whole investing platform around dividend stocks called Dividend Stocks Rock. Still, I’m not convinced a 100% buy & hold strategy is the best way to maximize your investment these days.
The Investment Thesis Behind the Buy & Hold Strategy
Before I present my view of investing, I think it’s important to mention why the buy & hold philosophy is so seductive for many investors. First, several famous investors have used this method in the past. Guys like Warren Buffett have reputations for success to make following their path seem logical. Invest in solid companies that you can understand and buy only if you intend to hold the stock for ten years… or more. This is roughly what you can learn from the buy & hold strategy.
Then, there will be a horde of investors with shocking examples of company success over the years such as Coca-Cola (KO) which shows a total return of over 5,000% since 1978. But my point is not to debate as to whether or not you should buy & hold stocks for several years. This totally makes sense for your core portfolio, but if you want to maximize your return, I think you should add more trading habits to your investing strategy.
The Way I See Things: a Buy & Hold Core + a Growth Segment
I’ve had several reactions about my latest trade: selling a dividend aristocrats (McDonald’s NYSE:MCD) to buy a speculative company working in the oil industry which is down 35% since January 2014 (Black Diamond Group TSE:BDI). For many, this transaction looks like a trader’s move at best and like a gambler for others.
I told you already: I’m not the typical dividend investor. I have a set of 7 investing principles I follow religiously and I also allow some cash to make “growth additions” to my dividend portfolio. The point is simple: I have most of my portfolio in shares of companies I truly want to hold forever (such as JNJ, KO, Telus(T), ScotiaBank (BNS), DIS, WMT, etc) but I also allow myself to forget about 1 of my investing principles if I think there is a great opportunity on the market. I have done it in the past with STX, INTC and HSE which all reported profits over 25% over a short period of time. I’m currently holding AAPL, HP, Gluskin & Sheff (GS) and Balck Diamond Group (BDI) in my “additional growth” segment. When I sold MCD to buy BDI, I simply sold a part of my core portfolio to transfer it to my “growth” segment. My point is the following, what if MCD is the new KO that did an astronomic 1.82% (plus dividend) over the past 16 years???
You see it right, someone who bought and held Coca-Cola (KO) since June 30th 1998 until today only made 1.82% in appreciation. Thank god there is a dividend attached to this stock!
BDI’s drop in price is directly linked to the oil sand industry. BDI rents & sells modular equipment for remote areas. Its biggest market is renting modular homes in Northern Alberta for oil sand exploration businesses. However, nothing is stopping BDI from exploring other markets (basically any company with an interest to develop in a remote area) and generate additional revenue. The company shows solid fundamentals and pays over 5% in dividend yield right now. Between a stagnating company like MCD which is probably going to trade around $95-$100 in three years and BDI which can easily trade at $30 (from $19 right now) in 12 months, I’ll take the chance. Keep in mind that I’m not buying a weak company with shaky financials, if you look at BDI’s fundamentals, you will see that the company shows strong basics. Now it’s only a matter of going through the oil barrel storm before we see the light. The 5% dividend is more than enough to keep me waiting in the meantime.
To be honest, in this specific situation, the perfect scenario would have been to keep MCD and use new money to buy BDI. But since I didn’t have more liquidity at the moment and have been following BDI for the past 18 months, I thought it was the right time to make this move.
I’ve been using this strategy for a few years now and it has served me very well. Let’s see if its only luck or a solid investing strategy. I personally think it’s the latter!