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Value Dividend Investing: Very Tough Right Now

Posted on | November 30, 2011 | Comments Off

Value investing typically refers to investors who are able to successfully buy undervalued stocks and hold them for prolonger periods of time. It often requires being contrarian since an undervalued stock means that the market has either driven its price down via more sellers than buyers or the stock has fallen out of favor of major investors or both. To go against the heard requires a contrarian point of view.

Value dividend investing refers to value investing in the realm of high paying dividend stocks. Value dividend investing is our top goal.

The problem these days it that dividend stocks are getting lots of love. Dividend stocks are very much in favor with the general market, which means it’s very tough to find value or underpriced/undervalued dividend stocks.

Why are dividend stocks in right now? Well, because dividends offer are viewed as a buffer or protection against stock market losses. This is somewhat of a stupid concept because a 3% dividend yield hardly protects you from a 40% market drop but it’s a common view nonetheless. Moreover, dividend stocks are often more stable, less-cyclical stocks which mean they hold up better than high-flying growth stocks in a bear market. These all contribute to dividend stocks being viewed as “in” right now.

So what are we to do?

Well, the main thing to do is be patient. Now more than ever, patience is very necessary in today’s world of uncertainty and volatility.

As we’ve discussed and will continue to discuss at length on this blog, timing is a HUGE factor in your rate of return in the years ahead. If you allocate a large chunk of cash into a dividend stock at an overvalued price, you might have sub-par returns for a decade. On the flip side, if you buy at severely undervalued levels, you might outperform the market for a decade or two simply on that one transaction.

This means that it is worth waiting. It is worth sitting in cash for prolonged periods of time even when it feels like you’re missing out on a short term rally. Waiting in cash when others chase the market higher is a pillar of value investing, and frankly, is one of the main differentiators between successful value investors and the not-so-successful.

In today’s market, I’m waiting. I’m waiting for more volatility and lower levels. The last dividend stock I move into was Walmart when it dropped below $50. It is documented here.

Today’s world changes rapidly. Stock market moods change from day to day. A company that is dominant struggles to exist just a few years later (see RIMM, NFLX, etc.). Your entry point matters. Your entry point will determine if you are truly a value investor or just another investor chasing the latest hot stock. It’s difficult, requires discipline and more patience that you would ever have thought. But, the returns will be worth it.

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Peter Cundill, R.I.P.
Read more on Dividend Investing, Value Investing at Wikinvest