Why You Need Dividends

Value Investing is the way to reliably make money in the markets

I believe in value investing for three reasons:

Value investing makes sense logically - buy good stocks when nobody is excited about them, sell them when everybody wants them badly
In the past, value investing has worked wonderfully for me in up and down markets
It works for other value investors - like Warren Buffett - who outperform the market over long periods of time

I love elegant, simple solutions to complex problems. Want to make money in stocks? Buy stocks that have more equity than the market cap. Sell them when everybody else notices and gets terribly excited about the stock.

But there is one problem

When you are right and the rest of the market is wrong, you are about to make some big profits.

But... you run two big risks:

It takes a long time for the stock price to rise to the level you predict, or...
Executives at other companies will notice the undervalued company and acquire it for less than it is worth, cutting out some of your profit.

Waiting years

Lets start with the first problem: waiting years to be proven right. This is bad because your money could have been earning good returns in that time. It's much better to make your profits as soon as you can.

Getting acquired

Let's say you buy company A at $10 per share. You calculate that it's worth $30 per share. (Yes, a 3x value multiple has happened to me many times). Now the CEO of company B, company A's competitor, notices that it can be acquired for a third of it's value. Company B makes an offer of $12 per share to take over company A. The majority of the shareholders vote in favor because they'll get an instant 20% return.

But you wanted to get a 200% return! This deal cuts you out of the majority of your profits. And when you get a 200-percenter, you need to take it, because a single big win like that can carry your entire portfolio for a couple of years.

Why be dependent on the judgement and good intentions of others?

Now picture this: you find a company that makes a lot of money consistently. They have great margins and are fairly valued, or even undervalued.

They pay a steady dividend that is supported by a rock-solid business. Their sales are inflation-linked.

And their dividend yield is 10-15%.

We have a whole list of companies just like that.

Invest in some of these companies, and you'll not only get the benefits of value investing, but also a steady cashflow every single quarter. You'll likely get your investment returns regardless of what others do.

Happy investing!

Fred