If you follow me on twitter (@startingfrzero) you probably know that I’m a pretty big fan of the Boston area sports teams, especially the New England Patriots. Over the last few days the team has signed All-Pro cornerback Darrelle Revis ( 🙂 )and are working on signing former Seahawks cornerback Brandon Browner after several years of subpar play by their defensive backs in the playoffs.
Over the last few years, really ever since 2008, the team has been using washed up veterans, undrafted players better suited to special team roles, and rookies in their defensive backfield. While this money saving strategy had worked well in the regular season the last couple years, allowing the Pats to rack up a lot of wins, every year it seems to fall apart in the playoffs like this year in the AFC game at Denver and two years ago vs. Baltimore. This offseason the team decided to be aggressive and acquire top of the line players in an effort to finally get another championship.
So what does this have to do with stock investing? Signing cheaper, less talented players to achieve the team’s goal of winning another Super Bowl is akin to dividend growth investors buying lower quality dividend stocks and then trying to retire early. Lower quality stocks can lead to dividend cuts, which if happen during retirement could force you to go back to work to make up for the loss of income or cause you to change your lifestyle in a negative way. Kinda like once that subpar play catches up to the team in the playoffs, it ends their season. Mortgage REIT’s and other riskier dividend stocks can be great investments and make you a lot of money with their high yields but I wouldn’t want to count on them in the long run.
Like most investors, I’ve made plenty of mistakes when buying stocks. A few of them related to this topic was buying Intel (INTC) and Powershares Financial Preferred ETF (PGF) when I was starting out. Although both had fairly high yields for this low interest rate environment that we’re living in right now with a 4% and almost 7% yield respectively at the time, neither were good investments for reliable dividend growth which is what I’m trying to achieve. Intel’s dividend has remained stagnant for 7 quarters now. Had I done more research before I bought both of them instead of just chasing yield I would have realized that future dividend growth would probably be limited. I sold Intel last year after a small rise in the stock so I could turn a profit but continue to hold PGF since it is a relatively small position in my portfolio and it’s not worth it with commission costs to sell right now. It has been paying out the same monthly dividend of .09 cents per share since I bought it so I right now I’m keeping it as a sort of “fixed income” type investment. If the dividend ever gets cut though, it’ll probably be sold.
Today I try to only purchase blue chip dividend growth stocks like Coca-Cola (KO), Chevron (CVX), and Realty Income (O) and hope to add others like Exxon-Mobil, Johnson & Johnson, and General Mills in the future. Even though I usually have to pay a premium for these types of investments (like considering KO at a P/E of 20 a fair valuation) it will pay huge dividends (see what I did there? 😉 ) for me in the future as I know I can count on a rising stream of income from these stocks. While “less blue chip” stocks have a place in a portfolio, (I mean we all need to have some fun with investing every once in a while right? 😛 ) they shouldn’t make up the core of your retirement/financial independence accounts. This would be like trying to get to the Super Bowl with a bunch of rookies playing defense against a Tom Brady or Peyton Manning, it’s just not going to work. 😉
Full Disclosure: I am long KO, CVX, O, and PGF. Please see my disclaimer page.
Do you have a investing policy with only investing in blue chips? Do you ever add in a riskier, higher yielder to boost your income? What percentage of your portfolio do you allocate to these types of stocks? Share below with a comment.