Dividend growth investors are very special kinds of investors who are looking for dividend growth specifically. In most cases, this kind of investor want to find a stock that has increased its annual dividends over many years without a break. In order to find these stocks, it is important to understand the conditions that create success in this arena.
One Week Pullback Strategy, Trading Every Week:
This very successful strategy involves getting into a stock as it pulls back significantly over the course of five to seven days. Over the past 10 years, investors brought in an annualized return of around 10%. It was not uncommon to see returns of 13% or more over the course of a single year.
If a trader buys and sells every week using this strategy, he has a chance to grossly outperform the market.
One Week Pullback Strategy, Trading Only Once:
The performance of the same stocks in the example above do not hold muster when the trader only trades once for the same investments. Short term investing is actually the preferred strategy here, not long term investing. The factors that cause changes in stocks – sentiment, volatility, quality and value – take their toll over many months and years and do not provide a good rate of return for the dividend growth investor.
Testing Our Strategy With Low Volatility:
Let us assume that we bought 50 low volatility stocks with dividends reinvested into new positions rather than into the same companies. Compared against the Vanguard Dividend Appreciation ETF, we beat the market by around 140% if we had bought in 1999 and latched on until 2009.
Testing Our Strategy With High Volatility:
Let us take the same case – however, instead of the 50 lowest volatility stocks on the market, we purchase the 50 with the highest volatility. The risk is not as extreme as one might think over the same time period. If the investor can stomach the slightly higher swings, the overall result after a 10 year hold is slightly advantageous.
The trick with dividend reinvestment is to define what you consider low and high volatility stocks. If you ask five investors, you will get five answers, but choosing the right benchmark has a lot to do with the success of the people who come out ahead. In general, staples will give you low volatility while things like tech and finance will give you slightly larger volatility (and a bigger reward if you can just hang on).