The author of this book advocates buying dividend growth stocks as long-term investments and automatically reinvesting the dividends. After 10 years, he argues that this strategy can produce 11% yields (on cost) and 12% average annual total returns, which he calls his "10-11-12 system." This sounds great on the surface, but there are several problems with the book that make it a poor guide to dividend growth investing:
- His "10-11-12 system" is overly simplistic and represents more of a goal than a systematic approach to dividend growth investing. He suggests that investors need to focus on just three things: initial yield, dividend growth rate, and payout ratio. Almost nothing is said about assessing the quality of the underlying business. The topic of valuation is completely ignored, which I consider to be a major fault.
- He presents several tables showing projections of dividend income and total return over 20-year periods under various circumstances, many of which are unrealistic. For example, there is a bear market projection in which stocks slowly lose value year after year, yet the dividend growth rate is a stable 10% over the 20 years. While this results in phenomenal growth of the dividend income stream, it also results in stocks having current yields by Year 20 of 20% or higher, which is simply not going to happen for the blue-chip stocks under consideration, especially if their operating results allow them to maintain 10% dividend growth rates. Thus, I think some of his projections are wishful thinking that ignore the nuances of reality.
- He basically advocates a buy-and-forget approach to investing. He gives little to no advice on how to monitor companies or manage a portfolio (aside from recommending that a stock be sold if its dividend is cut). He does the reader a disservice by conveying the impression that a company that has raised its dividend for 25 years is pretty much guaranteed to raise it for another 25 years; he even calls dividend growth stocks "Perpetual Dividend Raisers," as though their dividend growth will never end, which is unrealistic.
- The secondary title of the book is "A Proven System for Earning Double-Digit Returns" but the author never actually proves it. That is, he presents some historical data showing how well dividend stocks have done in the past and projections of how his system might perform in the future, but he provides no proof that his system can produce the results he claims in actual practice. There is a chapter in which he discusses the "Perpetual Income Portfolio" that he manages, but he reports neither its long-term returns nor the stocks in it. (He provides a completely useless table showing just the dividend yields of the stocks in the portfolio -- without indicating the stocks!) If he has truly been able to prove his system works in practice, then his credibility would have been strengthened by reporting the results of his portfolio in the book.
- There are also some errors in the text that undermine the author's credibility. For example, "yield" is often used for yield on cost, muddling the distinction between current yield and yield on cost. In a section that addresses inflation, he argues that one should seek a current yield that beats inflation, which is erroneous thinking because what matters is whether the dividend growth rate -- not the yield -- beats the inflation rate. At one point he also provides a definition of standard deviation that is just plain wrong.
- More generally, the writing style is too verbose. For example, there is an 11-page chapter with the sole purpose of describing a few lists/indices of dividend growth stocks, such as the S&P Dividend Aristocrats. That information could have been summarized in less than two pages. Despite the book being 180 pages, I think a good editor could have easily shortened it to less than 150 pages.
Note: I read this book in September 2012.